Land Registration, Rectification of the Register: When will the Court find that exceptional circumstances justify not rectifying the register?
May 19, 2020
A fraudster wreaks havoc and then disappears leaves two disappointed litigants to fight over the remnants. Many important judgments have arisen out of circumstances where the Court has had to decide which of two innocent parties is to lose out. However, in Dhillon v Barclays Bank Plc and Chief Land Registrar  EWCA Civ 619, as a result of the fraudsters actions the Claimant had been left with a property which she did not own prior to the fraud. She applied for rectification to remove a charge which had been registered on the title as part of the fraudulent transactions. The Court of Appeal upheld the Judge’s decision that exceptional circumstances existed which meant the register should not be rectified to remove the charge.
The circumstances were as follows:
Mrs Dhillon has lived in the property since 1993. She was a secure tenant of the London Borough of Hackney. By 1999 she had acquired the right to buy the property, but this stalled because as the Judge found, Mrs Dhillon did not have the means of making the payment of £167,000 which was required to exercise the right. The Judge found:
“This would have meant that the best she could have hoped to achieve by exercising her right to buy would have been to purchase and then sell on thereby profiting from the margin between the purchase and the sale price and, possibly entering into a leaseback arrangement with the purchaser.”
On 9 September 2002, Hackney executed a deed transferring its freehold estate to Mrs Dhillon. Mrs Dhillon knew nothing of the transaction or the payment of the purchase price.
On 20 September 2002, the property was transferred to a company referred to as CEL. Mrs Dhillon did not know about this transfer either, the transfer was a forgery. CEL charged the property to a lender.
These transactions were referred to in the Judgment as Transfer 1 and Transfer 2. Both transfers were treated as void, this position was not disputed by the Respondents.
On 3 November 2002 the charge was refinanced and Woolwich PLC (now Barclays Bank PLC) had a charge registered over the property.
In 2006, CEL were struck off the Register of Companies and the property vested in the Crown bona vacantia. The Crown disclaimed the property and the property escheated.
In 2010, Mrs Dhillon obtained a vesting order of the property vesting in her “all the estate and interest which immediately prior to its dissolution was vested in CEL” Thus she was the freehold owner of the property subject to the charge.
The Court of Appeal stated that the property was worth around £1 million and the amount secured on the charge was around £650,000.
Paragraph 3 of Schedule 4 of the Land Registration Act 2002 states:
“(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.
(4) In sub-paragraph (2), the reference to the title of the proprietor of a registered estate in land includes his title to any registered estate which subsists for the benefit of the estate in land.”
The Court of Appeal stated that the sole question on the appeal was whether the Judge was wrong to find that there were exceptional circumstances under sub-paragraph 3 that justified the Court not rectifying the register.
The Court approved the two-stage test in Paton and Anor v Todd  EWHC 1248 (Ch) namely:
“Thus, in a case within para. 6(3), the court must ask itself two questions: (1) are there exceptional circumstances in this case? and (2) do those exceptional circumstances justify not making the alteration? The first of these questions requires one to know what is meant by “exceptional circumstances” and then to establish whether such circumstances exist as a matter of fact…
- “Exceptional” is an ordinary, familiar English adjective. It describes a circumstance which is such as to form an exception, which is out of the ordinary course, or unusual or special, or uncommon; to be exceptional a circumstance need not be unique or unprecedented, or very rare but it cannot be one that is regularly, or routinely, or normally encountered: see R v Kelly  1 QB 198 at 208 C-D (a decision from a very different context but nonetheless helpful as to the ordinary meaning of “exceptional circumstances”). Further, the search is not for exceptional circumstances in the abstract but those which have a bearing on the ultimate question whether such circumstances justify not rectifying the register.”
The Court of Appeal found that there were a number of exceptional circumstances:
a) Mrs Dhillon never owned the property and could never have afforded to buy the property.
b) Mrs Dhillon could never have been in a better position than CEL, because it was CEL’s title that vested in her. It was found that it was the title of CEL rather than a new freehold that had vested in Mrs Dhillon.
c) Mrs Dhillon would have to rely on void transfer 1 (Hackney – Mrs Dhillon), i.e. a document of which she had no knowledge and did not sign.
However, it was recognised that the loss of a charge to a lender in good faith is not uncommon, as mortgage fraud happens all the time, but as the Coulson LJ held: “it is wholly exceptional for such a loss to occur in circumstances where the occupier never owned the freehold of the property; paid nothing towards the property; could never have afforded to buy the property without immediately selling it; where the original conveyance to the occupier was void because it was procured by fraud; and that, if the Register was rectified, the occupier would become the owner of the unencumbered freehold as a result of that fraud.”
Having identified these exceptional circumstances the Court found that they justified the non-rectification of the register as:
a) Rectification would create a windfall for Mrs Dhillon as she would own an unencumbered £1 million property she never owned and could have never afforded, as a result of a fraud, albeit a fraud that she had nothing to do with.
b) Non-rectification would leave her in much the same position as she would have been in 2002, she would have had to buy the property with a mortgage and then have sold it, although the Court noted that the equity of redemption would be much larger now than in 2002.
c) The Court rejected the argument that the possibility indemnity payable by the Chief Land Registrar to Barclays on rectification “short-circuit” the consideration of exceptional circumstances. The Court only put it as high as a factor which many be relevant to the two-stage test in certain circumstances.
Returning to the opening paragraph of this note, the Court had to choose between two innocent parties, and the writer agrees with Coulson LJ where he held at paragraph 74: “Non- rectification therefore is amply justified: it is a just and proportionate outcome.” However, the Court achieved this outcome by applying orthodox principles namely the test in Paton v Todd.
The Judgment is also of note for what it did not decide:
a) Whether the removal of the charge was the rectification of the relevant mistake or whether it was the transfer to CEL which was the mistake.
b) Whether Mrs Dhillon could “pick and choose between the void transfers” as characterised by Counsel for Barclays, who argued that she could not.
These issues were not decided by the Court because they did not need to be decided.
The Court also did not decide whether Mrs Dhillon was in fact seeking alteration of the register rather than rectification, which would have meant the indemnity would not have arisen. This issue was not addressed because it was not pleaded. The Coulson LJ emphasised the importance of pleadings, stating:
“The question of the relief being claimed by Mrs Dhillon was central to this case. If the CLR had wanted to say that this was not a case of rectification at all, then it was required to plead such a contention. That was in order that the parties could properly marshal their arguments to address that submission and so that, in due course, the court would know what issues it was being asked to decide. It is too often the case in civil litigation that the pleadings become forgotten as time goes on, and the trial can become something of a free-for-all. That is not appropriate.”
All three of the above issues are of at least equal interest to land lawyers to the exceptional circumstances point and with the proliferation of mortgage fraud described in the Judgment, the appellate Courts may be required to provide an answer before long.