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A peculiar case of priorities

In Bank of Scotland v Joseph [2014] EWCA Civ 28, 1 P & Cr 18, the Court of Appeal was faced with an issue of priority in relation to a unilateral notice. It arose out of a rather curious set of facts.

The developer had granted a long lease of a flat in Docklands to a Mr Samad at a price stated to be £965,000 (it turned out to be £733,400) on a date stated to be 11 March 2005. On 11 May 2005 Mr Samad was registered as proprietor of the flat. Subsequently, in 2011, a Ms Joseph was registered as proprietor in place of Mr Samad on the basis of an assignment from Mr Samad purportedly dated 10 March 2005. Ms Joseph denied having been involved in any such transaction.

Of the price of £965,000 stated on the assignment as paid by Ms Joseph £820,000 was provided by the Bank pursuant to a legal charge which, because she was not then registered as proprietor, it sought to protect by way of a unilateral notice placed on the charges register “in respect of a mortgage dated 10 March 2005 in favour of the Bank of Scotland”. When the Bank later had Ms Joseph registered as proprietor it registered its charge. 

However, by then, a company, Wingfield Financial Heritage Ltd, had registered a legal charge granted to it by Mr Samad on 11 March 2005 to secure a guarantee. This was registered in 2010 and in due course Wingfield obtained possession of the flat and sold it to a Mr Lyons, a director or former director of Wingfield. He therefore acquired, as against the Bank, such priority as Wingfield enjoyed against the Bank’s unilateral notice. The contest as to who enjoyed priority was therefore effectively between the Bank and Mr Lyons as the action between the Bank and Joseph had been compromised.  

This was a second appeal by Mr Lyons. The courts below had decided the question of priority on the basis that, Ms Joseph having denied involvement, the Bank did not in fact have a charge over the property. The case proceeded on the basis that all the transactions had taken place on 10 or perhaps 11 March 2005, that the £820,000 provided by the Bank to Ms Joseph had passed to the developer (and was sufficient to discharge the actual price of £733,400) and the Bank was thus entitled to be subrogated to the developer’s unpaid vendor’s lien.

The central question was therefore whether the unilateral notice, referring as it did to a charge which was taken to be non-existent and containing no reference to an unpaid vendor’s lien or subrogation, was sufficient to provide the Bank with priority against the legal charge that Wingfield had registered in 2010 and on which Mr Lyons could rely.

Mr Lyons’s case was that it was important that the register, being a public document, was accurate in every respect so that persons viewing it could rely with confidence on its contents without needing to carry out further enquiries as to whether a notice was accurate or justified. Reference was made to Rule 83 & 84 of the Land Registration Rules governing the form of a unilateral notice and what it must contain, in particular Rule 84 (2): “The entry must identify the estate or registered charge affected”; also to the provisions of s34 (1) c) of the Land Registration Act 2002 which provides that the registrar may only approve an application for an agreed notice where he is satisfied as to the validity of the applicant’s claim. The Bank should have identified what interest it relied on arising out of the charge if it was not the charge itself. Rights arising by way of subrogation to an unpaid vendor’s lien were very different from those created by a charge. They could have been, but were not, registered as a distinct interest in the land by way of unilateral notice. The consequence, it was said, was that an entry in terms of a non-existent charge should not enjoy any priority.

In a judgment delivered by Patten LJ, with whom the other members agreed, the Court, dismissing the appeal, considered otherwise. The provisions of s36 of the Act entitled the registered proprietor to apply for the cancellation of a unilateral notice and the registrar could have referred any dispute between Wingfield and the Bank to the Adjudicator, who could have made an order requiring the amendment of the notice or its replacement by another notice based on the interest which he deemed to exist. Rule 84 (5) of the Rules provided that the entry must give such details of the interest protected as the registrar considers appropriate. These pointed strongly away from the appellant’s contentions on construction. The absence of any obligation on an applicant to specify the details of his interest beyond what the registrar might require could not be reconciled with a submission that the failure to spell out any alternative legal bases to protection emanating from the charge of 1 March 2005 was fatal to the protection of the Bank’s subrogated lien.There was nothing to suggest that the registrar was not content to accept the details that were offered. If inaccurate they could have been challenged under s36, Wingfield had taken no steps to challenge the entry and it was too late for Mr Lyons to contend that the notice failed to protect the priority of the Bank in respect of its interest. On an application under s36 the most that would be achieved would be the inclusion of some reference to the alternative security.

Patten LJ also, obiter, pointed to s77 of the Act, and indicated that the existence of a statutory remedy in damages for misdescription might suggest that a defective notice would be binding on the registered proprietor and subsequent transferees notwithstanding its inaccuracies.

It is understood that permission to appeal to the Supreme Court is pending.  

It is tempting to wonder whether the result might have been different if the party applying to register the unilateral notice had been culpable in relation to the misdescription of the rights giving rise to the notice. In the present case there was nothing to suggest that the Bank was other than an innocent participant in the curious course that events took and only sought to register a notice to protect the security to which it thought that it was entitled. The terms of the judgment and the approach which the court took to the matter of construction of the legislation suggest that culpability in this respect would not make any difference to the question of priority by way of depriving the applicant of his entitlement (although a subsequent incumbrancer might have a remedy in damages under s77).