Mortgage fraud and a chargee's power of sale

Outline of the facts/decision

A third party fraudulently transferred Mr Guy's property and then secured a mortgage against his property in favour of Barclays Bank plc.

Mr Guy applied to the Court of Appeal to rectify the register and have the charge, in favour of Barclays, removed from the title (the High Court had decided that the charge should remain on the register). The Court of Appeal determined that it was possible to rectify the register in order to remove the registration of the void transfer, and for Mr Guy to be reinstated as the registered proprietor, but the mortgage to Barclays would remain (approving the original decision of the High Court). The Court of Appeal therefore dismissed Mr Guy's appeal and decided that Barclays still had a valid power to sell the property.

As Barclays' charge was correctly registered then it can exercise its power of sale and a subsequent purchaser from Barclays will acquire the property free from any interest or claims from Mr Guy. At the previous High Court hearing, Barclays submitted that it had found a buyer for the property and wanted to proceed with the sale.

The Court based its decision upon section 58 of the Land Registration Act (the "Act"). A transfer that is fraudulent is voidable. This means that it is liable to be unscrambled when the fraud is discovered. However, s.58 of the Act offers protection for third parties who rely on the register as conclusive proof of ownership. The effect of s.58 is that when a person is entered in the register as proprietor, the legal estate is deemed to be vested in them. This applies even if that person would not otherwise have legal title (e.g. because they derived title from a fraudulent transfer). Therefore, Barclays was entitled to rely on the conclusiveness of the register that showed the fraudster as proprietor when it took its charge.

Overriding interests

A chargee's power of sale will be subject to any overriding interests. Overriding interests are unregistered interests that override registered dispositions. One of the overriding interests, listed in the Act, is the interest of persons in actual occupation of a property. To establish this overriding interest a person must show that they were in occupation of the property at the time of the disposition (e.g. at the time of the transfer or when the charge was granted) and continues to be in occupation of the property. There are exceptions to this rule and the most pertinent are:

1. that an interest cannot be claimed where an enquiry was made, before the disposition, of the person claiming the interest and that person failed to disclose their interest when they could reasonably have been expected to do so; and
2. an interest:
   1. which belongs to a person whose occupation would not have been obvious, on a reasonably careful inspection of the land, at the time of the disposition; and
   2. of which the person to whom the disposition is made does not have actual knowledge at that time.

Accordingly, if an innocent party (e.g. the victim of the fraud) is in occupation of a property (the subject of the fraud) prior to the fraud and continues to be in occupation then, potentially, a chargee will be bound by their overriding interest. The question of overriding interests was not considered by the court in Barclays Bank Plc v Guy (as Mr Guy was not in actual occupation of the property). Potentially, a chargee's power of sale would be subject to the overriding interest.

However, s.58 only applies to registered land. In unregistered land, the rule that a fraudulent transfer will not pass a good title still applies.

Indemnity/rectification

A person in Mr Guy's position could seek an indemnity from the Land Registry in respect of the loss that they have suffered (in this case, the continued existence of the charge registered in favour of Barclays). An indemnity can be claimed from the Land Registry for a variety of reasons (eg. the Land Registry inputting incorrect information in the register and this incorrect information being relied on). The most pertinent reason in this instance is where a person claims for loss suffered due to the 'rectification' of the register. Rectification occurs when a mistake, in the register, is corrected and this correction prejudicially affects the title of the registered proprietor. In Mr Guy's case reversing the fraudulent transfer involved correcting a mistake (because Mr Guy never intended to transfer the land) but the registration of the charge was not a mistake (as it was registered correctly from the information appearing on the register at the time of grant). Accordingly, Mr Guy could only claim an indemnity in respect of the rectification of the void transfer. The innocent party will have to base their claim on the fact that their loss results from a mistake (i.e. the registration of the void transfer) and that this mistake could be rectified (in Mr Guy's case it was).

The original owner remains entitled to have the register rectified in their favour, although this will be subject to any third party rights that have been acquired in reliance on the information in the register in the interim. However, if the fraudster had sold the property to a bona fide purchaser, the right to rectification would be lost and the original owner (e.g. the innocent party) would be left with a claim for indemnity against the Land Registry. The payment of an indemnity may be reduced if the Land Registry can show that the claimant contributed to their loss wholly due to their lack of care. It is possible that a failure to inspect a property (i.e. to check whether the occupants match those listed in a mortgage application) or raise comprehensive enquiries, to establish whether the transaction is bona fide, may result in the award of an indemnity being reduced.

The Land Registry has recently changed its procedures and now stipulates that where an applicant is unrepresented their application must be accompanied by the Land Registry's standard identification form to prove their identity. This tightens the Land Registry's practice but is unlikely to stop a determined fraudster from submitting applications to change the register.

Unilateral notice

The judge in Barclays Bank plc v Guy suggested that Mr Guy could have protected his position by registering a unilateral notice against the registered title when he became aware of the fraudulent transfer. In fact Mr Guy instructed his solicitors to register a unilateral notice but they failed to do this before the Barclays charge was registered (the unilateral notice was actually registered the day after Barclays' charge). The registration of a unilateral notice would have alerted any potential buyers of the property, or Barclays prior to it granting the mortgage, to the existence of the dispute and Mr Guy's potential claim for rectification. If a person in similar circumstances to Mr Guy decided to follow this course of action then this would:

1. (if the unilateral notice is registered before the grant of the charge) notify the mortgagee of the existence of the dispute and is likely to prevent the mortgagee granting the mortgage; or
2. (if the unilateral notice is registered after the grant of the charge) not prevent any mortgagee exercising its power of sale but may impact upon the marketability of a property.

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