Another Success for Tim Polli QC in High Court Mortgage Case
13th March 2019
Author : Tim Polli QC
Judgment was handed down yesterday in the case of Dhillon v Barclays Bank  EWHC 475 (Ch). The case concerned a void transfer and the subsequent grant of a mortgage by the assignee under that void transfer to the Bank. In such circumstances, one might expect that a claim for the register to be altered so as to remove reference to the Bank’s mortgage would succeed. In this case, however, the Court concluded that there were exceptional circumstances as a consequence of which no Order removing the Bank’s charge should be made. Tim Polli QC represented the successful Bank.
The Claimant, Mrs Dhillon, had lived with her family in a house in East London (‘the Property’) since about 1989. She was originally a secure tenant of the local authority and, in time she acquired the Right to Buy the Property. She commenced the process of exercising that right in about 1999 but, as far as she was concerned, she did not hear further from the Council. In fact, without her knowledge, Mrs Dhillon’s then husband fraudulently “hijacked” her application to exercise the Right to Buy. He fraudulently induced the local authority to proceed with the sale, apparently to Mrs Dhillon, in the process forging Mrs Dhillon’s signature on the Deed by which she purported to receive the transfer. Simultaneously, and again fraudulently, he forged Mrs Dhillon’s signature on a transfer selling the Property to a company, CEL, which was acquiring it as a BTL investment. Completion of those transactions took place in September 2002. A month later, CEL mortgaged the Property to the Bank. At all material times, Mrs Dhillon continued to occupy the Property as her home. CEL thought that it had agreed a short-term tenancy of the Property with Mrs Dhillon.
In March 2003, Mrs Dhillon accompanied her former husband to Pakistan. She returned in about July 2003, having been informed by her eldest daughter that, in her absence, her possessions had been removed from the house and other people were now occupying it. Shortly after her return, she reported her husband’s fraud to the police.
CEL was dissolved from the Register of companies in 2005. The Crown disclaimed the freehold, which escheated. Mrs Dhillon applied for a vesting order and, in October 2010, it was ordered that the estate and interest that had been CEL’s was vested in her name.
In 2015, Mrs Dhillon commenced proceedings against the Bank and the Chief Land Registrar seeking the removal of the Bank’s charge from the register. Her case was that the effect of her former husband’s fraud was that both the acquisition from the local authority and the sale to CEL were void. Consequently, and whatever the merits of her claim to the Property, she claimed that the transfer to CEL was a mistake within the meaning of paragraph 3(2) of Schedule 4 of the Land Registration Act 2002 and that she was therefore entitled to have the charge granted by CEL to the Bank removed from the title.
The Judge’s Findings of Fact
At trial, the Judge concluded that the signatures purporting to be those of Mrs Dhillon on the TR1s by which the Property was assigned by the local authority and by which the Property was assigned on to CEL were forgeries, that Mrs Dhillon knew nothing about either transaction and that both transactions were therefore void as contended by Mrs Dhillon. Importantly, however, the Judge also found as a fact that Mrs Dhillon would have been unable to afford to exercise her Right to Buy the Property, without funding her purchase with a simultaneous sale.
Mrs Dhillon’s Argument
Paragraph 2 of Schedule 4 provides that the Court “may” make an Order for the alteration of the register for, amongst other things, the purposes of correcting a mistake. It has been established by previous authority that:
- Registration of title in the name of a purported assignee under a forged transfer is a mistake within the meaning of para 2(1)(a) of Schedule 4 to the Land Registration Act 2002 – see NRAM v Evans  EWCA Civ 1013,  1 WLR 639 at  to ; and
- The Court’s jurisdiction to correct a “mistake” pursuant to paragraph 2 of Schedule 4 is broad enough to permit not only the removal of void transactions from the register but also the removal of derivative transactions consequent on or following void transactions – see Knights Construction v Roberto Mac  2 EGLR 123, cited with approval by the Court of Appeal in MacLeod v Gold Harp Properties Ltd  EWCA Civ 1084,  1 WLR 1249 at  to  and . Accordingly, if the assignment to CEL was a mistake, the Court had jurisdiction to alter the register to remove the charge granted by CEL to the Bank.
It is well known that paragraph 3(2) of Schedule 4 to the LRA 2002 provides protections for the proprietor in possession of a registered estate but those provisions did not assist the Bank. Mrs Dhillon therefore contended that the Court must order the alteration she sought pursuant to para 3(3) of Sched 4 unless there were exceptional reasons which justified its not doing so. She contended that the fact that the alteration might give her a windfall was not an exceptional reason, relying on Walker v Burton  EWCA Civ 1228;  1 P&CR 9.
The Bank’s Arguments
The Bank’s arguments in response were all founded upon the observations: (a) that insofar as Mrs Dhillon stood in CEL’s shoes, she had no grounds to set aside the mortgage; as between CEL and the Bank it was a perfectly valid mortgage; (b) that Mrs Dhillon could not claim to be entitled to the freehold in the Property without relying on and adopting the fraud of her former husband on the local authority; and (c) Mrs Dhillon was never entitled to the unencumbered freehold of the Property and could never have hoped to acquire it without immediately selling the Property.
Accordingly, the Bank argued that the case that Mrs Dhillon sought to advance offended the principle of illegality as explained in Patel v Mirza  UKSC 42  AC 467. Alternatively, the Bank argued that Mrs Dhillon could not separate the assignment to CEL from the acquisition from Hackney; as a matter of fact, the two transactions were inextricably interdependent in that the latter was funded by the former. Accordingly, whilst the Court had jurisdiction to alter the register to correct a mistake, the alteration that Mrs Dhillon sought would not, in fact, correct a mistake because Mrs Dhillon could not allege that the assignment to CEL was a mistake without also accepting that, on her case, the transfer of the Property to her was also part and parcel of the same mistake. Alternatively, the Bank argued that Mrs Dhillon’s application was an abuse of process in that it ought to have been pursued back in 2010 when she first sought to recover the Property. Finally, the Bank argued that, for the same reasons, the facts of this case were entirely exceptional and justified the Court not making the order for the alteration sought.
The Court’s Decision
The Court found for the Bank on the grounds that there were exceptional circumstances which justified not making the order for alteration of the register sought by Mrs Dhillon. Mrs Dhillon had never owned the Property; prior to her husband’s fraud, she was only ever the secure tenant and, although she had acquired the Right to Buy she was unable to exercise it without funding her acquisition by a simultaneous sale of the Property. She was only able to suggest that she was entitled to the unencumbered Property by relying on the acquisition from the local authority, that she maintained was fraudulent and void. Refusing the alteration properly reflected the fact that she would never have been able to exercise the Right to Buy without funding the purchase with an immediate sale.
Mrs Dhillon’s application for permission to appeal was refused.
The Bank’s Right to an Indemnity
Although the Bank had not brought a claim against the Chief Land Registrar (‘CLR’) for an indemnity, the availability (or lack of availability) of such an indemnity was relevant to the existence or otherwise of exceptional circumstances. For that reason, the Court considered whether the Bank would be entitled to an indemnity from the Land Registry in the event that the rectification sought by Mrs Dhillon was ordered.
The Chief Land Registrar (‘CLR’) argued that, although the alteration sought constituted rectification for the purposes of the Indemnity scheme in Schedule 8 of the LRA 2002, the Bank would not suffer loss within the meaning of paragraph 1 of Schedule 8 because Mrs Dhillon’s right to seek rectification constituted an overriding interest that took priority over the Bank’s charge (relying on that part of Malory Enterprises Ltd v Cheshire Homes (UK) Ltd  Ch 216 that survived Swift 1st Ltd v Chief Land Registrar  Ch 602). The Bank’s charge was, therefore, always inherently vulnerable to the rectification sought and the Bank would therefore suffer no substantive loss as a consequence of any alteration. The CLR argued that the Bank could not rely on paragraph 1(2)(b) of Schedule 8 – which had provided the solution to this problem in Swift 1st – because the Bank was not claiming under a void disposition. Although the transfer to CEL had been forged, the Bank’s charge had not.
The Bank contended that it was clear from Swift 1st that Schedules 4 and 8 were meant to mirror each other and that, as rectification for mistake is given a wide meaning in Schedule 4 encompassing derivative transactions, the meaning of “claiming … under a forged disposition” in paragraph 1(2)(b) of Schedule 8 ought to be given a similarly wide meaning encompassing derivative transactions so as to ensure that an indemnity is available where rectification for mistake is granted. Accordingly, if and insofar as the Bank’s charge might be rectified as being a derivative transaction following the void transfer to CEL, then the Bank should be regarded as claiming under a forged disposition (being the void transfer to CEL) within the meaning of paragraph 1(2)(b) of Schedule 8.
The Court agreed with the Bank on this point, deciding that, if rectification had been ordered, then, in principle, the Bank would have been entitled to an indemnity. The CLR’s argument that the Bank had suffered no prejudice or no loss was not correct.
Team: Timothy Polli KC
Expertise: Banking & Mortgages
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