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Rectification vs adverse possession addressed in recent case

The Court of Appeal has found that a registered proprietor whose title originates from a forged transfer is able to defeat an application for rectification based on adverse possession due to the expiry of limitation.

This case looks at the complex issue of whether an application for rectification of the proprietorship of the Land Register on the basis of a forged transfer can be defeated by adverse possession on the part of the current registered proprietor (whose title originates from the fraud).

Background

The facts of this case are complicated, as the original proprietor and the fraudster have the same names.

  • Nov 1985 - Mohammed Rashid (MR2) became registered proprietor of 40 Henley Street (the Property)
  • May 1989 – whilst MR2 was in Pakistan, Mohammed Rashid (MR1) was registered as proprietor – based on forged documents and a forged transfer
  • June 1989 – MR2 returns from Pakistan and is told by MR1 that the Property has now transferred. MR2 informed the police and sought advice from a solicitor but was advised that he didn't have a case
  • October 1989 – MR1 gifted the Property to his son, Farakh Rashid (FR), and transferred it into FR's name
  • 1 November 1990 – FR (aware of the circumstances of the original fraudulent transfer) is registered as proprietor. The Property is used as an investment property and rented out
  • 13 October 2002 – Land Registration Act 2002 (LRA02) comes into force
  • 31 October 2002 – 12 years from the date of registration of FR as proprietor
  • September 2013 – MR2 applies for rectification of the register

A number of questions arise in this case, all of which are dealt with below:

Can MR2's claim for rectification be defeated by adverse possession on the part of the current registered proprietor?

The First Tier Tribunal and the Upper Tribunal both said "no" to this question, with MR2 being allowed to rectify. However, the Court of Appeal takes a different view.

Can there be a separation of legal and equitable title?

There is much debate in this Judgment about whether legal and equitable title can be separated, and in what circumstances.

The Court considered and applied the controversial decision in Malory v Cheshire [2002] EWCA Civ 151 in which it was decided that a fraudster doesn’t get (or doesn’t have the power to convey) the beneficial interest in the property.

In Malory, the true owner was a company referred to as Malory BVI (BVI). Another company was dishonestly set up with the same name, and it procured a new land certificate. That company was referred to as Malory UK (MUK). BVI remained in possession (and in actual occupation) of the land. MUK then sold the land to Cheshire Homes. It was agreed that the register should be rectified so as to show BVI as the registered proprietor. However, BVI claimed damages for trespass against Cheshire Homes (because Cheshire Homes had entered the property and demolished a building on it).

The key to whether a separation occurs comes down to whether there was a disposition of registered land (rather than a first or concurrent registrations):

  • S69(1) LRA25 deems a proprietor of land to have vested in him the legal estate in fee simple in possession. This section, consequently, only deals with the legal estate.
  • S20 LRA25 states that a disposition of registered land for valuable consideration confers on the transferee a legal estate together with "all rights, privileges, and appurtenances" (ie. the beneficial estate). Both legal and beneficial interests pass to the transferee.

In the Malory case, once registered as proprietor, Cheshire Homes was governed by S69 LRA25 (it held the legal interest). However, since the transfer to Cheshire Homes couldn't be effective in law, it couldn't be a disposition and so S20 LRA25 didn't apply (it didn't hold the beneficial interest). Accordingly, the legal and beneficial estate had been separated. Cheshire Homes was subject to the rights of BVI as beneficial owner.

So, in essence, where there is a fraud by the transferor, the beneficial ownership of a property is not affected but the legal estate does transfer as a result of S69 LRA25.

The Appeal Court also considered that there are two types of case involving fraud where a separation may occur (referring to Snell's Equity 33rd edition) -  "A distinction must be drawn between fraud consisting in the outright taking of a person’s property, wholly without his consent, and a transaction induced by a fraudulent misrepresentation."

Snell goes on to state that, in the former type of fraud, "the thief’s possessory title is subject to the claimant’s equitable entitlement to have the property specifically restored to him so that he holds it as a constructive trustee."

The Appeal Court concluded in the Rashid case that the transfer was forged (and therefore void); that MR2 had nothing to do with the disposition and had no knowledge of it and that the current registered proprietor (FR) was associated with the fraud and not an innocent buyer. The result being that MR1 (and subsequently FR) became the registered proprietor and acquired title. However, he acquired no more than the legal estate (pursuant to S69 LRA25) leaving MR2 as the beneficial owner.

Does the eventual transfer to FR change this?

No. The transfer to FR does not expunge the defect. "the legal and beneficial interests in the property are separated as a consequence of MR1’s fraud, and that .. separation is not cured by the subsequent gift."

The transfer to FR was made without valuable consideration (it was a gift). S20(4) Land Registration Act 1925 (LRA25) states that these types of disposition (gifts) are subject to minor interests. MR2's beneficial interest is considered to be a minor interest and, accordingly, FR's legal estate remains subject to MR2's interest. Effectively, FR was holding the land on constructive trust for MR2.

Does FR have a defence under adverse possession?

The short answer is yes! The court made a number of findings:

  • MR2 didn't need to wait for the register to be rectified to sue for possession
  • In any event, for the purposes of limitation, MR2's right of action to recover the land started when he was dispossessed by MR1
  • S18(1) Limitation Act 1980 (LA80) states that the provisions of the Act shall apply to equitable interests in land in the same way as they apply to legal estates. Therefore, MR2 had a right of action
  • As the land was registered, and due to MR2 retaining his beneficial interest in the Property, S75 LRA25 applied
  • S75(1) LRA25 states that the estate of the person registered as proprietor shall not be extinguished but shall be deemed to be held by the proprietor for the time being in trust for the person who has acquired title against any proprietor. S75(2) goes on to say that any person claiming to have acquired a title under LA80 to a registered estate in the land may apply to be registered as proprietor thereof
  • This leads to 2 possibilities:
    • After 12 years, MR2's equitable 'estate' was held by him on trust for MR1; or
    • During the 12 years, MR1 and FR held the legal estate on a constructive trust for MR2, and upon expiry of the 12 years the beneficial interest was extinguished and the legal and beneficial interests merged.
  • In either of the above scenarios, based on Schedule 12 paragraph 18 of LRA02, FR would be entitled to become proprietor:
    • 18(1) - Where a registered estate in land is held in trust, … he is entitled to be registered as the proprietor of the estate, and
    • 18(2)&(3) - A person has a defence to any action for the possession of land … if he is entitled … to be registered as the proprietor … and the court must order the registrar to register him as the proprietor ..
  • As a result, there is no point rectifying the register to show MR2 (or his estate, as he has since died) as the proprietor, as FR has an unanswerable claim to re-rectify back into his name pursuant to Sh12 para 18 LRA02 (as above).

Could MR2 argue illegality?

No. Even if the doctrine of illegality applied here (ie. but for the fraud, MR2 and FR would not have been in possession), it would only serve to invalidate the registration BUT it wouldn't change the fact that MR2 and FR enjoy adverse possession.

Paragraph 18 (3) of Schedule 12 to LRA02 states that where in an action for possession of land a court determines that a person is entitled to a defence (in this case adverse possession), the court must order the registrar to register him as the proprietor of the estate in relation to which he is entitled.

If the court has the power to make an alteration to the register, it must do so, unless there are exceptional circumstances which justify its not doing so. The finding in this case is that a defence of adverse possession amounts to exceptional circumstances and it follows that alteration of the register cannot take place.

The point being that limitation is there to ensure certainty. S32 LA80 does extend limitation in cases of fraud until the claimant has discovered the fraud. However, in this case, MR2 had discovered the fraud early on and knew that he had a grievance by 1990 – he just didn't take action within the relevant time period.

And although leaving FR in possession where the origin of his title depends on fraud is an unattractive result, the fraud/wrongdoing cannot be used (via the doctrine of illegality) to undermine the law of adverse possession and limitation generally.

As the Court succinctly put it: "…correctly analysed, the outcome in this case is not the result of the fraud but of the true owner’s subsequent failure to take effective action to challenge it….Although the result is undoubtedly a hard one, that is not because MR2 did not have full legal rights to face down the fraud but because he did not exercise them in the 12 years during which they were available to him."

Conclusion

Whilst this is a case to do with adverse possession, it will be interesting to see how the concept of the separation of the legal and beneficial interest in a title will be developed in future case law - and in what circumstances - given the possible wide-ranging implications it may have upon a party’s ability to provide title guarantee.

Contributors: Dawn Webber & Lynsey Robinson

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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