THE recent decision of the High Court in Swift 1^st Ltd. v Chief Land Registrar [2014] All E.R. (D) 12 (Feb) considered the status of a registered, but flawed, land transaction, and the possibility of obtaining an indemnity where a charge is removed from the register.

The facts of the case were simple. Mrs R was registered proprietor and occupied the property at all relevant times. In April 2006 a charge was forged, purportedly from her, in favour of GE Money as security for a loan amounting to £32,000. This charge was entered on the register. In May 2006, a second charge was executed in favour of Swift 1^st Ltd. for £64,500. Again, this charge was forged, but again, it was registered, and the GE Money charge was removed from the register, part of the Swift 1^st Loan being used to settle the debt with GE Money. Upon discovery of the fraud, the Swift 1^st Ltd. charge was removed from the register, and Swift 1^st claimed an indemnity from HM Land Registry. The Land Registry disputed the availability of an indemnity on the basis that although Swift 1^st's “title” had been removed, it had not been prejudicially affected by the alteration. Swift 1^st argued that the provisions of schedule 8 mean that a forged conveyance, as here, is to be treated as valid for the purposes of assessing the need for an indemnity, and that they had in fact therefore suffered a loss.

The decision, by contrast, is complex. There are many points at which the reasoning of Richard Sheldon Q.C., sitting as a deputy judge of the High Court, was obscure. Nevertheless, in its most basic terms, the court agreed with Swift (at [39]). The court accepted that the removal of the charge, thanks to the decisions in Malory v Cheshire Homes ([2002] EWCA Civ 151, [2002] Ch. 216) and Fitzwilliam v Richall Holdings ([2013] EWHC 86 (Ch), [2013] 1 P. & C.R. 19), did not prejudicially affect Swift (at [32]). Their rights under the charge were subject to an overriding interest to set aside the charge and alter the register (at [41]). However, the provision in schedule 8, para. 1(2)(b) meant that even though the charge was always inherently limited in this way, we ought to treat it as though it was not so limited (at [39]), and that thanks to this “legal fiction”, Swift 1^st had suffered loss and was entitled to an indemnity (at [44]).

A central plank in the court's reasoning was that Malory was binding upon the court, as confirmed in Fitzwilliam. The correctness of both decisions has been considered elsewhere (E. Lees, (2013) 76 M.L.R. 924; and M. Dixon, (2013) 129 L.Q.R. 320). In those cases, the court was considering a void conveyance of legal title to the freehold estate and the effects of that conveyance once title to the estate was guaranteed through registration. It was held that although the register guarantees legal title (under Land Registration Act 2002, s. 58), it is silent as to equitable title (Malory at [65], Fitzwilliam at [85]). Therefore, on a void conveyance, a trust would arise in favour of the original proprietor.

In this case, it must be that the court considered that the benefit of the charge was held on trust for Mrs R by Swift 1^st. The judge did not express himself in these terms, but the mechanism of treating the charge as a mortgage by demise means that the charge is treated as an estate in land, and, as a result, section 58 is relevant as much to a charge as it would be to a leasehold estate. The result is somewhat bizarre, in that here we have the benefit of a charge held on trust for the proprietor of the freehold title. The practical consequence appears to be that although the combination of sections 51 and 58 guarantees to confer upon the chargee the powers of the legal mortgagee, these powers are constrained by the duties of the bare trustee. The judgment, however, is not entirely clear on this point.

The next step in the judge's reasoning was his reliance on para. 1(2)(b) of schedule 8. This provision states: “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”. Counsel for the registrar had argued that this provision was directed towards questions of quantification, not questions of “prejudicial effect”. The judge clearly had sympathy with this argument (at [35]), as, it is suggested, he should have done. But he was unable to accept it. Given the effect of Fitzwilliam and Malory, without this provision it would be almost impossible to obtain an indemnity. That must be right, which is precisely why Fitzwilliam is wrong. The interpretation given to the provision here does however give the judge a “way out”, allowing Swift 1^st to obtain an indemnity by avoiding the consequences of the conclusion that they had lost nothing but bare legal title, notwithstanding the judge's decision on the issue of the effect of conveyance and registration.

The judge also discussed the relevance of the “overriding interest” belonging to Mrs R and the effect of the disposition on this, again relying in part on Malory (at [36] and [41]). The reliance on overriding interests here was mistaken, albeit that the mistake was understandable as it was perpetuated in Fitzwilliam. Mrs R's interest was not an overriding interest. There was no disposition which it could “override”. At the time of the creation of the charge in favour of GE Money, there was no interest until the charge was registered. Mrs R was simply a proprietor. Her right to rectify arose on registration of the charge for GE Money. When the second charge was created in favour of Swift 1^st, her right to rectify did not “override” that second charge, because her right to rectify as against GE Money disappeared when that charge was discharged. She obtained instead a new right to rectify as against Swift 1^st. This was not an interest which overrode the creation of the charge, but one which resulted from the creation of the charge. Her actual occupation was therefore irrelevant.

It made little difference on the facts of this particular case whether her interest was treated as overriding or not, but it was a fallacy that came about from Malory and one which was repeated in Fitzwilliam. It was unfortunate that it was carried through into the judge's reasoning.

Thus, at all three stages of the Richard Sheldon Q.C.'s reasoning there were problems with the interpretation of the 2002 Act. These errors were not entirely a result of the approach in Swift 1^st Ltd. They originated in Malory, and were then followed in Fitzwilliam.

What is the correct position? Swift 1^st was registered by mistake. This mistake was a mistake made by them, and by the Land Registry. The register was then rectified. This prejudicially affected Swift 1^st's interest. How could it not do so? The forged charge – thanks to sections 51 and 58 of the LRA 2002 and the provisions of the Law of Property Act 1925 – meant that during the period of registration Swift 1^st had powers that they would not otherwise have had, and had the status of chargee. When the charge was rectified, they lost these powers and that status. This was a prejudicial effect. Thus, they were entitled to their indemnity.

It could be argued, however, that there was a good reason not to give Swift 1^st an indemnity. Swift 1^st had not in fact relied on the register in granting their charge. They had relied on the conveyance document. Why, in these circumstances, should the Land Registry foot the bill? The reason is that confidence in the register is, or should be, the entire point of the new registration system. By paying your registration fee, and placing your faith in the Land Registry, they pay where you lose out (subject to reduction if some of the loss is your own fault). The Land Registry fee can be considered, in effect, an insurance premium. It is not such a premium where you simply enter a notice on the register. The register in such cases does not purport to guarantee the validity of your right. But thanks to section 58, it does guarantee your charge, or your freehold or leasehold estate in land. Consideration of trusts, of reliance on forgery as central to the ability to obtain an indemnity, and of overriding interests, is to misinterpret what this statute actually says.

The line of cases interpreting the 2002 Act provisions has now reached a point where a thorough examination of the position by a higher court is required. Piecemeal development at first instance has resulted in much uncertainty. Hopefully, this opportunity will present itself sooner rather than later.