Void Charge Removed from the Register

Garguilo v Jon Howard Gershinson & Anr [2012] EWLandRA 2011_0377 (06 January 2012)

We are pleased to welcome solicitor and partner Anis Waiz of Mohindra Maini LLP as he continues his critical review of current case law. Here, Anis examines Garguilo v Jon Howard Gershinson (2) Louisa Brooks Joint Fixed Charge Receivers of Desmond Daniel Charles Moore in respect of 140 High Street, Godalming ( Deeds) [2012] EWLandRA 2011_0377 (06 January 2012)

Introduction

Here we examine a very important and perhaps unnoticed decision of the Adjudicator to HM Land Registry which raised two substantive legal issues. The execution of a lease and who has the right to seek rectification.

As a result of this case the Land Registry replaced its earlier guide to Rectification and indemnity in January 2012 . http://www.landreg.gov.uk/upload/documents/pg39.html

Background

Mr and Mrs Garguilo applied to the land registry to rectify the register of a title to property in surrey. They and another party were the registered owners. They sought to cancel a lease purportedly granted to a third party and a charge in favour of a Bank . Both the Lease and the Charge were registered in September 2008. The background facts are somewhat complicated and the reader is referred to the judgment.

The third party a borrower of the bank failed to make payment to the Bank and accordingly the Bank appointed LPA receivers over the property. The LPA receivers were respondents to the application.

The application was made on the basis the Lease was a nullity because a third party did not knowingly sign the Lease.

Between the parties it was common ground that if the Lease was void then the registration of the Lease constituted a ‘mistake’ for the purposes of paragraph 5(a) of Schedule 4 to the Land Registration Act 2002 (the 2002 Act)

In addition under paragraph 6(2) of Schedule 4 of the 2002 Act there was an important issue as to who could apply to remove both the Lease and the Charge.

Issues

Mr and Mrs Garguilo submitted that the Lease was invalid as it was not validly executed as a deed because it did not comply with section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 (the 1989 Act). The Respondents’ position was to put Mr and Mrs Garguilo to strict proof of their case.

The adjudicator set out the key facts as to the execution of the lease and again the reader is referred to the Judgment. Of note is the adjudicator’s conclusions on the evidence and the legal analysis.

Findings

The adjudicator found that:

1 The central factual issue in this case is whether a third party executed the Lease that is to say whether he signed the execution page and the plan knowing that they related to the Lease. It is not in dispute that he did not do so at the meeting where the other leases were executed.

2 However she found that the pages signed by him (the final execution page, and the plan) were, at the time of signature, separate from the remainder of the Lease. This conclusion was inescapable in the light of certain correspondence. There was also a hand written, undated, note which appears to have been written by a solicitor during the course of a meeting (or phone call) “Me to send you lease for 4.Pages”

3 No evidence was given to counter the evidence of the third party . However she was satisfied he did sign the relevant pages knowingly and willingly. There were a number of reasons. First, the entire deal between the parties and the Bank, depended on the execution of leases. Without the execution of the Lease the third party would not have become the joint freeholder . It was clearly in his financial interest to make sure the deal went through.

Secondly the third party’s evidence was that he expected another party to make arrangements to satisfy the Bank and may have convinced himself, or have been convinced, that those arrangements could be made once the deal was done, and that another would, in due course, transfer the Lease to Mr and Mrs Garguilo (free of the Bank’s Charge).

More importantly the third party did not have any satisfactory explanation as to how his signature came to be on the relevant pages. It was not accepted he was signing so many documents, or so many plans, that he did not know what he was doing.

Execution of the lease

The Adjudicator found:

1 the signature page and the plan were signed by the third party and that he did so knowingly and willingly. The Lease was therefore not a forged document.

2 As to section 1 (3) of the 1989 Act Mr and Mrs Garguilo submitted that even if the signatory pages of the Lease were, as found, executed separately and inserted into the Lease this invalidates the instrument as a matter of law.

Section 1 (3) provides

An instrument is validly executed as a deed by an individual if, and only if,

(a) it is signed –

(i) by him in the presence of a witness who attests his signature’

It was submitted that the word it in the section must refer back to the deed in other words the entire document, and not merely the execution pages or any other page. The point was considered by Underhill J in R v Her Majesty’s Commissioners of Revenue and Customs [2008] EWHC 2721. The claimants sought judicial review of the decision of HMRC to seek warrants to search their offices and the decision of the Crown Court to grant the warrants. HMRC’s case was that the scheme (trust deed) in question was flawed and that the claimants sought dishonestly to conceal the flaws. The judge therefore had to consider whether the scheme was flawed. There were differences between the drafts and the final versions.

The court in that case considered as an additional factor that each of the three key documents was intended to be a deed. Noting section 1(3) Underhill J said: ‘Mr Bird submitted, and I agree, that that language necessarily involves that the signature and attestation must form part of the same physical document (the ‘it’) referred to at (a) which constitutes the deed.’ [40]. He also stated: ‘ I accept that the flaws on which HMRC rely are essentially formal. But I see nothing wrong in applying a strict test of formality to the validity of the agreements with which we are concerned in this case. The entire raison d’etre is to create – and demonstrably to create – a series of formal legal relationships: if they do not do that, they do nothing.

3 Here the Adjudicator found that section 1(3) clearly provides that the signature and attestation must form part of the physical instrument at the moment of signing. The policy argument is that the signature should reflect the proper agreement. If the signature is obtained separately the maker cannot be sure of the terms of the deed and the risk of fraud or mistake remains.

The question must always be whether the signature page and other relevant pages formed part of the same physical document. That will be a question of fact in each case.

In this case, the relevant pages were clearly separate from the remainder of the Lease: they were signed separately and returned separately (and not by the third party) at some unspecified time after the other leases were executed (and after the third party had stated, initially, that he did not intend to execute the Lease) and were accordingly not in any sense part of the ‘it’ referred to in the statute.

4 By Section 52(1) Law of Property Act 1925 all conveyances of land are void for the purpose of creating a legal estate in land unless made by deed. Accordingly, in the adjudicators judgment, the Lease was void as it was not made by deed.

The issue of estoppel was raised by the respondents. However it was held that the lack of a (valid) signature could not be cured by estoppel.

Who could apply for rectification ?

Schedule 4 para 6 (2) (a) (b) makes provision as to alteration of the register . It provides

“No alteration affecting the title of the proprietor of a registered estate in land may be made under paragraph 5 without the proprietor’s consent in relation to land in his possession unless—

(a)he has by fraud or lack of proper care caused or substantially contributed to the mistake, or

(b)it would for any other reason be unjust for the alteration not to be made”

In this case

1 The Respondents, as LPA receivers (and as agents for the borrower) were not in possession of the property. Neither was the borrower.

2 However the question was whether the borrower was deemed to be in possession by virtue of section 131(2) of the 2002Act. This section provided that the possession of a tenant is deemed to be that of the landlord; of the Lender that of the borrower of the licensee that of the licensor

There was no direct relationship of landlord or tenant or licensor and licensee between the borrower and another . However on the evidence, the borrower consented to another going into occupation, and knew of the arrangement made between them.

On these facts, and for the purpose of this section, the Adjudicator found that occupation of another could be said to be that of the borrowers licensee.

Alternatively pursuant to schedule 4 para 6 (2) (a) the question becomes whether the borrower caused or contributed to the mistake (the invalidity of the lease) by fraud or lack of proper care.

It was held there was lack of proper care either by the borrower or by his solicitor in allowing the Lease to be executed as it was. In any event, even if this were not the case, there were a number of factors which, make it unjust for the alteration of the register not to be made.

Conclusion

The register was rectified by cancelling the lease and the charge. That no doubt has very serious consequences for the lender and ultimately may lead to various claims .

Whilst the factual background is rather complex this case serves a timely reminder to conveyancers and lenders as to basic principles . Ignore proper execution of deeds at your peril.

Of significant interest is the adjudicator’s use of section 131 (2) of the 2002 Act and the key as to who is in possession and thus who was entitled to apply for alteration. Indeed the land registry have now altered its practice note.

Posted by: Stephen Moore (01/03/2012 21:56:20)