Case No: A3 2001 2764
Neutral Citation Number [2002] EWCA Civ 708
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION (Mr Michel Kallipetis QC
Sitting as a Deputy Judge)
Royal Courts of Justice
Strand, 
London, WC2A 2LL

Friday 24 May 2002
Before :

LORD JUSTICE Jonathan Parker

SIR CHRISTOPHER SLADE

- - - - - - - - - - - - - - - - - - - - -
Between :

	Ucb Group Ltd	Appellant	
	- and -		
	GILLIAN HEDWORTH	Respondent	

- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -

Mr Mark Wonnacott (instructed by Halliwell Landau) for the Appellant
Mr Geoffrey Zelin (instructed by Wholley Goodings) for the Respondent

- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court

Crown Copyright ©

Lord Justice Jonathan Parker  : 

1.	This appeal raises a question as to the meaning of paragraph (g) of section 70(1) of the Land Registration Act 1925 (“the Act”), which is concerned with overriding interests.   The specific issue on the appeal is whether a beneficiary under a bare trust of registered land who is in receipt of periodical payments made by the registered proprietor under a tenancy by estoppel of the land granted by the beneficiary is in receipt of “rents” of the land within the meaning of paragraph (g), and thus entitled to an overriding interest.
2.	The issue arises in the context of a claim by the appellant, UCB Group Ltd (“UCB”), as chargee, for the vacation of a caution registered against the title to the charged property on the application of Mrs Gillian Hedworth, the respondent to the appeal, who maintains that she is entitled to an overriding interest taking priority over its charge.   UCB sought summary judgment on the claim under Part 24 of the Civil Procedure Rules.   On 2 November 2001 Mr Michel Kallipetis QC (sitting as a Deputy Judge of the High Court, in the Chancery Division) dismissed the application.   He granted UCB permission to appeal, and UCB now appeals.
3.	The relevant facts, which are agreed for the purposes of this appeal, are as follows.
4.	Mrs Hedworth’s husband, Mr Peter Hedworth, is and has at all material times been the registered proprietor with title absolute of the freehold estate in a property known as Albion House, 2 Winchester Street, South Shields, Tyne and Wear (“the Property”).
5.	The Property consists of a building comprising a ground floor and three upper floors.   On a date prior to December 1990 Mr Hedworth let part of the ground floor to G. Bovill for a term of 25 years from 16 December 1988.   In 1991, the passing rent under that tenancy was £4,500 per annum.    On 27 July 1990 Mr Hedworth let a further part of the ground floor to Baker Street Audios Ltd for a term of 25 years from 10 July 1989 at a rent of £6,500 per annum (subject to periodic review).  At all material times Mr Hedworth has occupied the remainder of the Property, using it as an office.
6.	By a Legal Charge dated 20 December 1990 (“the UCB Charge”) Mr Hedworth granted to UCB Bank plc a first charge over the Property to secure repayment of all moneys from time to time owing by him to UCB Bank plc.   The UCB Charge was registered at HM Land Registry on 31 January 1991.   UCB is the successor to UCB Bank plc as chargee under the UCB Charge.
7.	On 25 March 1997, on the application of Mrs Hedworth, a caution was entered on the title to the Property.   In her application for the entry of the caution Mrs Hedworth said:
“a.   In about 1990 I allowed my husband, Peter John Alan Hedworth, to sell my antique furniture and works of art and to keep the proceeds of sale  in consideration for him transferring to me all his real property interests including [the Property].
b.   By a deed dated in about January 1990 (which deed is now lost) Peter John Alan Hedworth purported to transfer all his real property interests to me.   The said transfers were not registered but were effective to transfer to, or vest in, me the beneficial interest in all his property interests including [the Property].
c.   Alternatively, by the said deed Peter John Alan Hedworth declared himself trustee of all his real property interests (including [the Property]) to be held on trust for me.
d.   Alternatively, by reason of the agreement stated in paragraph ‘a’ above and my reliance thereon, from about January 1990 Peter John Alan Hedworth has held [the Property] on constructive trust for me.
e.   At the time of the grant and registration of [the UCB Charge] I was in receipt of rents and profits of [the Property].   In the premises, my beneficial interest in [the Property] is an overriding interest within the meaning of section 70(1)(g) of [the Act] to which the charge is subject.”
8.	UCB accepts, for present purposes, (a) that as at the date of the UCB Charge Mr Hedworth held the Property on a bare trust for Mrs Hedworth, and (b) that as at that date she was in receipt of weekly payments of £50 made by Mr Hedworth to her under a tenancy of the Property granted previously by her to Mr Hedworth in her capacity as beneficial owner.   It is not asserted by Mrs Hedworth that she has at any time been in receipt of the rents reserved by the two leases granted by Mr Hedworth.
9.	I can now turn to the relevant provisions of the Act.
10.	Section 20(1) of the Act provides that in the case of a freehold estate registered with absolute title, a disposition of a legal estate in the registered land for valuable consideration takes effect subject (unless the contrary is expressed on the register) to the overriding interests affecting the estate created.   
11.	Prior to the enactment of the Trusts of Land and Appointment of Trustees Act 1996 (“the 1996 Act”) “land” was defined in section 3(viii) of the Act as including land of any tenure “but not an undivided share in land”.   These last words were repealed by the 1996 Act.   The expression “registered land” is defined in section 3(xxiv) of the Act as meaning “land or any estate or interest in land the title to which is registered under [the Act]”.   The expression “overriding interest” is defined in section 3(xvi) of the Act as meaning (so far as material) “all the incumbrances, interests, rights and powers not entered on the register but subject to which registered dispositions are by this Act to take effect”.
12.	Section 70(1) of the Act provides as follows:
“All registered land shall, unless under the provisions of this Act the contrary is expressed on the register, be deemed to be subject to such of the following overriding interests as may be for the time being subsisting in reference thereto, and such interests shall not be treated as incumbrances within the meaning of this Act, (that is to say) – ...”
13.	There then follows a list of categories of overriding interests.   The only relevant category for present purposes is that which is contained in paragraph (g).   Paragraph (g) is in the following terms:
“The rights of every person in actual occupation of the land or in receipt of the rents and profits thereof, save where enquiry is made of such person and the rights are not disclosed.”
14.	The expression “such person” in paragraph (g) must refer to the person in actual occupation of the land or, where reliance is placed on the receipt of rents and profits of the land, to the person in receipt of such rents and profits.
15.	The word “rent” is defined in section 3(xxv) of the Act in the following terms:
“ ‘Rent’ includes a rent service or a rentcharge, or other rent, toll, duty, royalty, or annual or periodical payment, in money or money’s worth, issuing out of or charged upon land, but does not include mortgage interest.”
16.	As a matter of syntax, the adjectival clause “issuing out of or charged upon land” must qualify the words “or other rent [etc]”, since in relation to a rent service or a rentcharge such a qualification would be tautologous. 
17.	It should be noted that on the coming into force of the Land Registration Act 2002 (which received the Royal assent on 26 February 2002) the reference to receipt of rents and profits will be effectively deleted from paragraph (g).  The Third Schedule to that Act sets out the various categories of overriding interests. Paragraph 2 (which is headed “Interests of persons in actual occupation”, and which is the successor to section 70(1)(g)) reads as follows (so far as material):
“An interest belonging at the time of disposition to a person in actual occupation, so far as relating to land of which he is in actual occupation, except for – 
(a) ....
(b) an interest of a person of whom inquiry was made before the disposition and who failed to disclose the right when he could reasonably have been expected to do so;
(c) ....
(d) ....”

18.	However, since the Land Registration Act 2002 has not yet come into force, the question in the instant case is whether, by reason of her receipt of the payments of £50 per week made by her husband in respect of his occupation of part of the Property, Mrs Hedworth was a person “in receipt of the rents [of the Property]” within the meaning of section 70(1)(g).   It is conceded by UCB that if the payments in question are “rents” for this purpose, the fact that they are attributable to part only of the Property will not prevent the creation of an overriding interest.
19.	In paragraph 18 of his judgment the Deputy Judge concluded that:
“.... there is a fundamental issue which requires a determination and that is the precise terms of the arrangement between Mr and Mrs Hedworth.”

20.	The Deputy Judge continued:
“In my judgment, the court’s decision on the legal position will depend entirely upon its findings as to the transaction between Mr and Mrs Hedworth and the precise nature of her interest in [the Property].”

21.	That conclusion is consistent only with the Deputy Judge having rejected UCB’s contention that the facts asserted by Mrs Hedworth, even if established at trial, could not suffice to give her an overriding interest in the Property.    So much, indeed, is clear from the reasons given by the Deputy Judge for granting UCB permission to appeal.   Thus, in his statement of reasons for granting such permission the Deputy Judge, after formulating the point of law which arises, continued:
“Important point which would dispose of action if Court of Appeal decides that I was wrong."  

22.	I turn next to the submissions made by counsel on this appeal: submissions which were, if I may say so, admirably economical and clear.

23.	Mr Mark Wonnacott, for UCB, submits that the word “rents” in paragraph (g) is used in the strict sense of a periodical payment “issuing out of” land: see the definition of “rent” in section 3(xxv) (quoted earlier).  He submits that payments of rent under a tenancy granted not by the legal but by the beneficial owner of land (i.e. payments of rent under a tenancy by estoppel, where the estoppel will be “fed” on the beneficiary acquiring the legal estate) are not payments of “rent” in that strict sense since they cannot be said to issue out of the land: rather, they issue out of the beneficial interest.   As to the words “but not an undivided share in land”, which were at the material time (i.e. prior to the enactment of the 1996 Act) included in the definition of “land” in section 3(viii) of the Act (being words upon which Mr Geoffrey Zelin, for Mrs Hedworth, places some reliance), Mr Wonnacott submits that the fact that the draftsman of the definition did not see fit to exclude also an absolute beneficial interest under a bare trust is of no significance.   He points out that by virtue of paragraphs 2 and 3 of Part II of the First Schedule to the Law of Property Act 1925 an absolute beneficial interest subsisting behind a bare trust was on 1 January 1926 converted into a legal estate, whereas an undivided share in land could thereafter (until the enactment of the 1996 Act) subsist only behind a trust for sale. 
24.	Mr Zelin submits that on its true construction the word “rents” in paragraph (g) includes rent payable under a tenancy by estoppel such as was (on Mrs Hedworth’s case) granted by her to her husband.    He draws attention to the fact that the definition of “rent” in section 3(xxv) of the Act is in the same terms as the corresponding definition in section 205(1)(xxiii) of the Law of Property Act 1925, and that the corresponding definition in the Conveyancing Act 1881 included payments which did not issue out of the land (a point which is clearly brought out in Brown v. Peto [1900] 2 QB 653).    Further or alternatively, he submits that for the purposes of paragraph (g) an absolute beneficial interest subsisting under a bare trust of land is itself to be regarded as ‘land’, notwithstanding that it is not capable of being the subject of a registered disposition (see section 2 of the Act); and that sums payable as rent under a tenancy by estoppel granted by the beneficial owner are “rent” in the strict sense, for the recovery of which distress may be levied.
25.	As already noted, Mr Zelin also relies on the fact that although the draftsman of the definition of “land” in section 3(viii) of the Act saw fit expressly to exclude from the definition an undivided share in land, he did not similarly exclude a beneficial interest under a bare trust.   Mr Zelin submits that this indicates that such a beneficial interest was intended to be included in the definition.
26.	I accept Mr Wonnacott’s submissions.   A beneficial interest under a bare trust of registered land is not itself a registrable estate: rather, it takes effect in equity as a “minor interest” (see section 2(1) of the Act).  That is to say, it qualifies for protection under the Act not by means of substantive registration but by the entry on the register of a restriction or a notice, or (as has occurred in the instant case) by the temporary expedient of the entry of a caution under section 54 of the Act.   It follows, in my judgment, that such a beneficial interest does not fall within the definition of “land” in section 3(viii) of the Act.    The fact that (prior to the enactment of the 1996 Act) undivided shares in land were expressly excepted from that definition whereas there was no corresponding express exception of a beneficial interest under a bare trust seems to me to be of no significance.   It may well be that the draftsman of the definition did not consider it necessary to extend the express exception to include such beneficial interests given that a beneficiary under a bare trust of land can protect himself by exercising his right to call for the transfer of the legal estate in the land and being registered as proprietor.
27.	It follows, in my judgment, that rent payable under a tenancy by estoppel granted by a beneficial owner of land under a bare trust – that is to say, rent payable under a derivative interest carved out of that beneficial interest – is not rent “issuing out of” the land within the meaning of the definition of ‘rent’ in section 3(xxv) of the Act.   In the context of that definition, the expression “issuing out of” connotes, in my judgment, rent payable under a tenancy which has been carved out of the legal estate in the land.
28.	It follows, again, that on the assumed facts Mrs Hedworth was not (as at the date of the UCB Charge) in receipt of “rents” of the Property within the meaning of section 70(1)(g); and that her claim to an overriding interest is accordingly bound to fail.  That being so, the judge was wrong to refuse UCB’s application for summary judgment for the vacation of the caution.
29.	I reach this conclusion without qualms, since the contrary conclusion would have meant that in a case where the registered proprietor is the only person in actual occupation of the land, a prospective purchaser would, in order to protect himself, have to inquire of the registered proprietor whether he was paying rent to a third party.   I cannot think that that is a situation which the draftsman of the Act could have contemplated.   Moreover, as Mr Wonnacott pointed out, if in such a case the registered proprietor chose dishonestly to conceal the fact that he was paying rent there would be no further inquiry which the prospective purchaser could make; whereas in a case where someone other than the registered proprietor is in actual occupation of the land the very fact of his or her occupation is an indicator of the possibility of the existence of third party rights.
30.	For those reasons, I would allow this appeal, set aside the judgment of the Deputy Judge, and enter summary judgment on UCB’s claim for the vacation of the caution.
Sir Christopher Slade:
31.	I agree.  The conclusion reached by Jonathan Parker LJ is, in my judgment, reinforced by further consideration of the statutory purpose of section 70(1)(g) of the Land Registration Act 1925 (“The Act”).  The thinking behind the sub-section was, I believe, that there was no sufficient reason for extending the protection to the transferee of registered land (or of a legal estate therein)  ordinarily afforded by the registration of his title to protection against adverse rights which could have been discovered by or through actual inspection of the land before registration of the transfer.
32.	The legislature thought it was reasonable to expect any proposed transferee of registered land (or of a legal estate therein) to make such inspection and, having made it, to inquire of any persons, other than the registered owner, whom they found in actual occupation by virtue of what right (if any) they claimed to be in occupation and to what persons (if any) they paid rent for their occupation.  If the response was that they paid rent to third parties for such occupation, it would be reasonable to expect the proposed transferee then to ascertain the identity of such third parties and, having ascertained their identity, to inquire what rights in the land (if any) they, for their part, claimed.
33.	In my judgment, however, it would have been entirely contrary to the thinking behind section 70(1)(g) to expect a proposed transferee to make any enquiry of a registered owner who was himself in actual occupation of the land as to the right by virtue of which he claimed to be in such occupation or any further consequential inquiries.  His registered title would speak for itself.  Any equitable interests in the land (such as the beneficial interest of Mrs Hedworth in the present case), or any interests carved out of such beneficial interest, (such as the respective interests of the lessor and lessee under the tenancy by estoppel granted by Mrs Hedworth to Mr Hedworth) would be “minor interests” within the definition in section 3(xv) of the Act and would not bind a transferee of the registered land or a legal estate therein, once his title had been registered: (see section 20 and 23 of the Act).  They would remain behind the curtain of the registration.
34.	On the agreed facts, which we are asked to assume, from late January 1990 onwards Mr Hedworth held the property on trust for Mrs Hedworth, as absolute beneficial owner in equity.  If she had been in receipt of the rents payable to G.Bovill or by Baker Street Audio Ltd in respect of their occupation of parts of the property, she would have had an overriding interest, within the meaning of section 70(1)(g).  But, for reasons which have not been explained, she has not received any parts of such rents.
35.	In the circumstances it has not been and could not be suggested that Mrs Hedworth had  an overriding interest or anything more than a minor interest in the property, before she created the tenancy by estoppel in favour of Mr Hedworth out of her equitable interest.  The suggestion is that by entering into this arrangement with the registered proprietor, the existence of which no third party such as UCB could have suspected, she conferred on herself a new status, by becoming entitled to an overriding interest which would bind any third party taking a registered charge on the property.
36.	This suggestion cannot in my judgment be well founded.  My belief that such a result would not have accorded with the intention of the legislature in enacting section 70(1)(g) reinforces my opinion that Jonathan Parker LJ, has reached the right conclusion on this appeal.  I am in entire agreement with the analysis of the relevant statutory provisions and the route by which he has reached that conclusion.
37.	I would concur in allowing this appeal and in the order proposed.