REF/2006/0163/0174

The Adjudicator to Her majesty’s Land Registry
LAND Registration act 2002

IN the matter of a reference from hm land registry

BETWEEN

(1)	IRENE UZONWANE AJIBADE

							APPLICANT

and

(1)	BANK OF SCOTLAND PLC (formerly HALIFAX PLC)
(2)	ENDEAVOUR PERSONAL FINANCE LIMITED

								RESPONDENTS

Property Address: Leasehold property at 41 Church Lane Walthamstow 
London E17 9RN
Title Number: EGL423939

Before: Mr Rhys sitting as Deputy Adjudicator to HM Land Registry

At: Procession House 110 New Bridge St London EC4
On: Monday 10th March 2008

Representation:
Applicant:		Mr David Cook of Counsel instructed by Romain Coleman Solicitors
1st Respondent:	Mr Joseph Goldsmith of Counsel instructed by Shoosmiths Solicitors
2nd Respondent:	Mr Greville Healey of Counsel instructed by Lightfoots Solicitors

D E C I S I O N

KEYWORDS:	Rectification of the register – Fraud – “Correcting a mistake” – second charge – Schedule 4 Paragraph 5(1)(a) of the Land Registration Act 2002

CITATIONS:		Law Commission Report Number 271 paragraphs 9.4 and 4.10.  
Ruoff & Roper’s Registered Conveyancing at 46.028 and 46.029
Malory Enterprises v Cheshire Homes Ltd [2002] Ch 216
Argyle Building Society v Hammond (1985) 45 P & CR 148

1.	This adjudication arises out of two applications to alter the register of Title No EGL423929 ("the Property"), dated 16th September 2005, pursuant to section 65 and Schedule 4 Paragraph 5 of the Land Registration Act 2002 ("the 2002 Act").   Prior to 23rd May 2002 the Applicant was the registered proprietor of the Property.   On 11th December 2001 she purportedly executed a Power of Attorney in favour of her sister, Joanne Nwaiga.  On 22nd April 2002 Joanne Nwaiga, in her purported capacity as the Attorney of the registered proprietor, executed a Transfer in Form TR1 in favour of her husband, Mr Olufemi Abiola, who became registered as proprietor.  The transfer to him was a purported sale, partly funded by an advance from Halifax Plc (as it then was but now part of Bank of Scotland Plc), and Halifax Plc was duly registered as chargee in the Charges Register.  Subsequently, on 26th August 2003, Mr Abiola borrowed money from Endeavour Personal Finance Ltd ("Endeavour"), and the advance was secured by a second charge on the Property.  Endeavour was registered in the Charges Register on 29th August 2003.  By her application dated 16th September 2005, the Applicant alleged that the Power of Attorney was forged, and consequently that the Transfer to Mr Abiola was a nullity.  In this event, she claimed that the register should be altered to re-instate herself as proprietor, and that the charges entered into by Mr Abiola should be removed from the Charges Register.    The registered proprietor, Mr Abiola, did not respond or object to the application.  However, the chargees did oppose the alteration - in the case of the First Respondent, on the limited basis I shall describe below - and the dispute was referred for adjudication by the Chief Land Registrar pursuant to Section 73(7) of the 2002 Act on 5th February 2007.  

2.	Neither Respondent actively disputed the allegation of forgery - essentially, they put the Applicant to proof.  However, they differed in their approach thereafter.  The first Respondent accepted that its charge would have to be removed from the register, if it was established that Mr Abiola - the chargor - had no title to execute a charge over the Property.  In other words, if the Transfer to him was a nullity, he had no title to confer on the first chargee, and alteration of the register as against Bank of Scotland was conceded.  The second Respondent, Endeavour, took a different line.  For the reasons I shall explain in more detail below, it contends that whether or not the Transfer in favour of Mr Abiola was a nullity, its second charge must remain on the register, even if the Applicant succeeds in having herself restored as proprietor.  Essentially, it contends that Mr Abiola, once registered as proprietor, albeit by virtue of a fraudulent transaction, was entitled to charge the property to Endeavour, and consequently there is no "mistake" within the meaning of Schedule 4 Paragraph 5 to relieve against.

3.	Before considering the competing arguments on this issue I should state that I am satisfied on the balance of probabilities that the Power of Attorney was forged.  The Applicant herself gave evidence before me, and confirmed that she had never executed the Power and had never authorised her sister, or anyone else, to deal with the Property.  Her evidence was not challenged by the Respondents and, for my part, I was given no reason whatsoever to doubt the truth of her evidence.  Furthermore, she produced an expert report from Ms K E Caramiello, a Metropolitan Police forensic document examiner, who stated in that report that there was strong support for the view that the Applicant's signature on the Power was forged.  Again, the findings of this report were not challenged.  In the circumstances, therefore, I find as a fact that the Power of Attorney was of no effect, and consequently that the purported Transfer to Mr Abiola was not executed by the registered proprietor of the Property or anyone duly authorised by her.  In short, the Transfer was a nullity in unregistered land terms, although of course it was effective to procure Mr Abiola’s registration as proprietor.

4.	As I have explained, it follows from this finding that the register should be altered pursuant to Schedule 4 paragraph 5(1)(a) of the 2002 Act so as to (a) remove Mr Abiola as registered proprietor (b) reinstate the Applicant as proprietor and (c) remove the Charge in favour of Halifax Plc.  I shall direct this alteration.  The real issue, therefore, is whether the second charge in favour of Endeavour should be removed or, as Endeavour contends, should remain on the register, leaving (so it argues) the Applicant to her remedy against the Land Registry for an indemnity.  Endeavour's argument is as follows.  It contends that at the time its charge was created and registered, Mr Abiola was in fact the registered proprietor, with all that that entails.  In particular:
4.1	he was at that time deemed conclusively to be the proprietor of the legal estate in the Property under section 58 of the 2002 Act
4.2	in that capacity he had the power to charge the estate at law with the payment of money - see sections 23(1) and 24 of the 2002 Act
4.3	this was so irrespective of whether he was registered as proprietor by virtue of a mistake - see section 26 of the 2002 Act.
For my part, I entirely accept the propositions at 4.1 and 4.2.  However, I must question whether section 26 of the 2002 Act does in fact support the proposition at 4.3.  Section 26 is entitled "Protection of disponees" and is in these terms:
"(1)	Subject to subsection (2), a person's right to exercise owner's powers in relation to a registered estate or charge is to be taken free from any limitation affecting the validity of a disposition.
(2)	Subsection (1) does not apply to a limitation -
	(a)	reflected by an entry in the register, or
	(b)	imposed by, or under, the Act.
(3)	This section has effect only for the purpose of preventing the title of a disponee being questioned (and so does not affect the lawfulness of a disposition).

5.	Clearly, section 26 does not in terms refer to registration as a result of a mistake: it refers to "limitations affecting the validity of a disposition".  In my view, this expression is not apt to cover a situation where the owner has been registered as a result of a mistake, because "limitations affecting the validity of a disposition" more naturally refers to express or implied limitations which fetter an owner's powers - typically, the requirement to obtain the consent of a beneficiary or other person to a trustees' sale.  Furthermore, the power to alter or rectify the register under Section 65 expressly applies in cases of mistake - see Schedule 4 paragraph 5(1)(a).  Accordingly, section 26 does not in my view assist at all in determining whether Endeavour's charge should be removed.  All it purports to do is to protect a disponee where he or she has taken an interest in land as a result of a disposition which is beyond the powers of the "disponors" because their powers are subject to specified limitations.  In effect, it supplements the provisions of sections 23 and 24, but has no bearing, it seems to me, on the power to correct a mistake in the register.  

6.	Mr Greville Healey, who appeared for Endeavour, supported the arguments outlined above by reference both to the Law Commission Report Number 271 ("the Report") which gave rise to the repeal of the Land Registration Act 1925 (“the 1925 Act”) and the enactment of the 2002 Act, and to a passage in Ruoff & Roper’s Registered Conveyancing.   With regard to the Report, he cited two particular passages, at 9.4 and 4.10.  Paragraph 9.4 reads as follows:
"One of the most fundamental principles of registered conveyancing is that it is registration that vests the legal estate in the registered proprietor.  Clause 58(1) of the Bill provides accordingly that if, on the entry of a person in the register as the proprietor of a legal estate, the legal estate would not otherwise be vested in him or her, it shall be deemed to be vested in him or her as a result of registration.  Thus, for example, if a person is registered as proprietor on the strength of a forged transfer, the legal estate will vest in that transferee even though the transfer was a nullity"
This passage is incontrovertible and uncontroversial - it expresses the underlying principle of land registration as embodied both in the 1925 and 2002 Acts, that which has been described as “the statutory magic”.  However, this passage in itself does not take the matter any further, since although a person may become the legal estate owner through registration where he would not have done so in unregistered conveyancing, this registration is still subject to the Court's and the registrar's curative powers under Section 65 and Schedule 4.  This passage does not - and could not - claim that a person once registered as a proprietor is safe from any challenge to his title, since all registrations are subject to Section 65 and Schedule 4.

7.	Mr Healey also referred me to paragraph 4.10 of the Report, which is to be found in the section which explains the rationale for Clause 26 - which became section 26 of the 2002 Act - which deals with "Protection for disponees" and which is set out in full above.  Interestingly, the specific example given by the Law Commission to illustrate the operation of Clause 26 is the case where:
"(1)	W and X held land on a bare trust as nominee for Y, on terms that they could not make any disposition of land without Y's written consent;
(2)	Y, who was in actual occupation of the land held in trust, did not protect her interest by the entry of a restriction; and 
(3)	W and X fraudulently charged the land to Z without Y's consent in breach of trust."
The Law Commission states that in these circumstances "Z's charge would be valid and could not be called into question by Y".  This is entirely right, and consistent with my understanding of the operation of section 26 of the 2002 Act, namely that it is directed to a disposition that would otherwise be invalidated by a failure to comply with the terms of the power of disposal.  Again, however, it does not assist in understanding the scope of the power to correct a mistake.

8.	The relevant power to alter the register in the present case is found in Schedule 4 paragraph 5(a), which is in the following terms:
	"The registrar may alter the register for the purpose of -
		(a)	correcting a mistake….."
“Alteration” of the register where it predudicially affects the interests of a registered proprietor is known as “rectification”, and I shall use that expression. In essence, Mr Healey's argument is that there is no mistake in relation to Endeavour's charge, since it was created by the person who, at the material time, was the registered proprietor with all the powers of an owner.  According to this argument, the original mistake - the registration of Mr Abiola pursuant to a forged disposition - is no longer operative once he has become registered as proprietor.  Although he was first registered due to a mistake, once he is registered he is entitled to deal with the property in the same way as any registered proprietor.  Since he was entitled to charge the property pursuant to section 23(1)(b) of the 2002 Act there is no operative mistake in respect of which the registrar may exercise his powers.  Mr Healey cites in support of his argument paragraphs 46.028 and 46.029 of Ruoff & Roper, where the authors do indeed express the view that the power to correct for a mistake is not available in the precise circumstances of Endeavour's second charge.  They give a number of examples of the operation of the power to rectify the register.  In the case of a forged transfer which results in the registration of the fraudster as proprietor, they accept that the registrar would be right to rectify the register on the grounds of mistake.  This is, according to them, because the disposition giving rise to the registration was a nullity, since it was not actually executed by the registered proprietor. They cite Malory Enterprises v Cheshire Homes Ltd [2002] Ch 216 in support.   However, the authors contrast this outcome with the situation in which Endeavour finds itself - that is, a chargee of a registered proprietor who was originally entered on the register by means of a forged disposition.  Although the disposition was a nullity, once the fraudster has been registered he is entitled to deal with the land in the same way as any registered proprietor, and there is no "mistake" to relieve against.  Ruoff & Roper also express the view that the position would probably have been different under the 1925 Act, since there was a specific ground for rectification under section 82(1)(g) as follows:
"Where a legal estate has been registered in the name of a person who if the land had not been registered would not have been the estate owner".
Since this provision has been repealed, it is said that the 2002 Act was intended to limit the circumstances in which alteration of the register could take place, so as to benefit parties in the same position as Endeavour.

9.	I have set out at some length the arguments deployed by Mr Healey in support of his case.  I hope that I have done them justice.  For his part, Mr David Cook, who appeared for the Applicant, adopted a rather more general approach.  In effect, he relied on the principle that "fraud unravels all" and on the very wide formulation of the power to alter the register under Schedule 4, namely "for the purpose of - (a) correcting a mistake".  He argued that the original mistake - that of registering Mr Abiola as proprietor on the basis of a fraudulent transaction - continues to operate even after he has been registered, and the power under Schedule 4 paragraph 5 is not limited in the way contended for by Endeavour.  In short, he argued that the mistake is not cured in this case unless and until the second charge is removed – although he did not use this expression, I think he regarded it as the fruit of a poisoned tree.  

10.	Before trying to resolve the stark choice laid before me by these opposing arguments, I should point out that the unsuccessful party may nevertheless be entitled to apply to the Land Registry for indemnity under section 103 and Schedule 8 of the 2002 Act.  Manifestly, if the charge is removed due to rectification of the register, Endeavour is entitled to indemnity under Schedule 8 paragraph 1(1)(a) which provides for this in terms.  Mr Healey for Endeavour also submitted that the Applicant would be entitled to an indemnity under paragraph 1(1)(b), where loss is suffered by reason of " a mistake whose correction would involve rectification of the register ".  The Applicant's Counsel supported this submission.  I think the sub-paragraph means "a mistake whose correction would involve rectification of the register but no rectification takes place" or words to that effect.  In other words, there is an underlying mistake but for some reason the Court or the registrar decline to rectify the register.  In such circumstances, the party who suffers loss due to the fact that the register remains unrectified is entitled to indemnity. However, it seems to me that this cannot apply to the Applicant in this case, if I were to accept Mr Healey's definition of "mistake".  According to his argument, there was only one mistake, namely the registration of Mr Abiola as proprietor, which he accepts ought to be corrected by rectification of the register.  The registrar should also rectify the Charges Register to delete the Halifax Plc charge, which was also a nullity, having been executed by a person who was not the registered proprietor or her Attorney.  Once Mr Abiola was registered, however, he was entitled to confer a legal estate on a chargee such as Endeavour.  The instrument creating the Endeavour charge was not a nullity, and registration of Endeavour was not therefore a mistake.  Accordingly, it is difficult to see how the Applicant could be entitled to an indemnity under paragraph 1(1)(b) since, in the absence of any mistake, there was never any possibility of rectification.  I conclude, therefore, that although Endeavour might be entitled to an indemnity if I direct the registrar to delete the second charge, if I do not direct him to do so on the grounds relied on by Endeavour then the Applicant will not be entitled to an indemnity.

11.	The case turns, quite simply, on the meaning of the phrase "correcting a mistake….." as it appears in Schedule 4 paragraph 5.  Should I give it the narrow construction urged by Mr Healey – relying on the arguments set out in Ruoff & Roper – or should I construe it in the wider sense contended for by Mr Cook?  In reaching my conclusion I have regard to the following points (among others):
11.1	 Although obviously the underlying purpose and intention of our system of land registration is to make a title, once registered, as secure as possible, it has always been recognised that there must be a power in the Court and the registrar to rectify the register where a mistake has been made.  A registered title is not, therefore, absolutely guaranteed by the State – it is always subject to rectification on proper grounds.
11.2	However, where rectification has taken place, or where it has been refused notwithstanding the existence of a mistake, indemnity may be payable by the Land Registry to compensate for any loss.  In the present case, however, if the arguments of Endeavour are accepted, it would appear that indemnity is not payable to the Applicant if rectification is refused.
11.3	The phrase “correcting a mistake” in Schedule 4 is not defined.
11.4	I have found that Mr Abiola was registered as proprietor due to a fraud on the Applicant.  Mr Abiola did not object to the rectification, has taken no part in this adjudication and it is entirely possible that he was party to the fraud carried out by his wife.  

12.	In one sense, the arguments addressed to me by both the Applicant and Endeavour have been focussed on the wrong word – namely “mistake”.  The Applicant contends that the registration of Endeavour is, in effect, a mistake.  Endeavour contends that is not.  However, it is manifest, and not disputed, that there was an operative mistake when the Land Registry registered Mr Abiola as proprietor of the Property.  The real question, it seems to me, is to decide how far the registrar can go in “correcting” that mistake.   It is accepted that Mr Abiola should be removed from the register and the Applicant replaced as proprietor in the Proprietorship Register.   It is also accepted that Halifax Plc should be removed from the Charges Register. Would these steps entirely correct the original mistake?  The Property would still remain subject to the second charge created by the fraudulently-registered Mr Abiola, and the Applicant would regain her title but encumbered by this charge.   It does not seem to me that, in such circumstances, the mistake has been fully corrected.  Certainly, all the consequences of the mistake would not have been corrected, even though it would be open to the registrar to so by rectifying the Charges Register by removing Endeavour’s charge.  In my judgment, there is no basis for construing the expression “correcting a mistake” in such a restrictive way.  It seems to me that this formulation is intended to give the registrar wide scope to exercise the discretion to rectify in a fair and just way.  It would have been possible to have imposed express limitations on the power in the sense contended for by Endeavour if this had been the intention. – as indeed limitations have been imposed in regard to proprietors in possession (see Schedule 4 Paragraph 6).   It seems to me that it would be perverse to limit the registrar’s power to rectify the register to the correction of only one consequence of the mistake, leaving uncorrected the other direct consequences of the original mistake.  Protection for parties in the position of Endeavour is to be found both in the undoubted requirement that the registrar should exercise his power in a fair and just way, and in the existence of an indemnity from the Land Registry.  

13.	It may be argued that the ability of the registrar to correct not just the original mistake but also the consequences of a mistake could lead to an undermining of the “sanctity” of a registered title.  It might be said that this power could be used to rectify the register against purchasers at several removes from the original fraudster.  However, in practice this would not be a problem in my view.  In particular, the restrictions contained in Paragraph 6 – in respect of proprietors in possession – operate to limit very substantially the ability to rectify against successors in title.   Furthermore, there is no suggestion that the more numerous grounds for rectification of the register as set out in section 82 of the 1925 Act undermined confidence in the operation of the land registration system under the previous regime.  The power to rectify will necessarily be used sparingly, but the exercise of the power is a matter for the Court or the registrar.  It may be noted that the Court of Appeal in Argyle Building Society v Hammond (1985) 45 P & CR 148 made it clear that the power to rectify under the 1925 Act was not to be construed restrictively, but was a discretion to be exercised in accordance with all relevant circumstances.  In doing so the court expressly disagreed with the analysis in the then current edition of Ruoff & Roper which – as is the case today – sought to construe the power to rectify under section 82 in a restrictive way.

14.	Accordingly, I agree with the Applicant that the Charges Register can and should be rectified so as to remove Endeavour’s charge, leaving it to its remedy for indemnity under Schedule 8 of the 2002 Act.  Although I must be careful not to import into the operation of the 2002 Act doctrines relevant to unregistered conveyancing, nevertheless in reaching this conclusion I am encouraged that this decision will as far as possible reverse the effect of a fraudulent transaction.  Had the Endeavour charge remained on the Charges Register, it would be undeniable that a property interest arising out of a fraud would have continued to blot the Applicant’s title.  It would in my view have been regrettable if the 2002 Act had to be construed in such a way that both the Court and the registrar would have been powerless to have righted this wrong.  The phrase “fraud unravels all” may not be directly applicable to our system of statutory land registration, but I believe that the provisions of Schedule 4 Paragraph 1(1)(a) are designed to achieve a similar result in appropriate circumstances.

15.	I shall order that the Chief Land Registrar gives effect to the Applicant’s applications as if no objection had been received.  I do not see why the Respondents should not also pay the Applicant’s costs.  However, since I heard no argument on this point, I will allow each Respondent a period of 14 days to submit written representations why they should not pay the costs, and the Applicant may have 7 days to reply.  Once these submissions are to hand I shall consider the matter further.

Dated this 8th day of April 2008

By Order of The Adjudicator to HM Land Registry