Ambiguous leases and mistakes in land registration

In a High Court case decided earlier this year, the Court considered how to construe a lease which contained ambiguous demise clauses and how to deal with rectification of the description of the demise in the Land Register (John Patrick Murphy v Lambeth London Borough Council (2016) Ch D, 19 February 2016).

Background

The property in question was a flat within a four-storey building divided into four flats and a basement. The entry in the Land Register noted that both the ground floor flat and the basement were included in the title to the property. The basement had a separate entrance at the front with steps leading down, was secured by a lock on the door and contained electricity meters for the flats above. The ground floor flat had been sold to Mr M’s predecessor in title under the right to buy provisions of the Housing Act 1985 and the flat was demised by a long lease.

Mr M was a property developer. He purchased the property in 2013 with the intention of splitting the ground floor and basement into 2 separate dwellings. In April 2014, the local authority (as freeholder) granted conditional permission for Mr M to do so. In June 2015, the local authority reversed its decision on the grounds that Mr M did not own the basement, which it said had not been demised to his predecessor. The right to buy notice described the relevant property as the ground floor flat. Whilst the lease contained a recital which referred to the tenant’s flat as including the basement, the relevant operative demise and plan in the lease did not mention the basement.

The Claim

Mr M sought a declaration from the Court that he was the registered proprietor of the basement as well as the ground floor and that he was in possession of it.

The local authority claimed that the lease did not demise the basement, that the inclusion of the basement within the title was a mistake and that the property register should be rectified.

The Issues Considered

1. Whether the lease, on its proper construction, demised the ground floor flat and basement;
2. If the lease only demised the ground floor flat, whether the Land Register should be rectified.

1. The construction question

The Court found that where there are clear but inconsistent parts of a lease, the operative part is to be preferred.

In this case, the demise was complete and precise in the way it incorporated the area and it would be surprising if the recital had priority. This construction was consistent with the facts; for example, it would be unusual for somebody to have sole ownership of a basement which was used to house communal electricity meters. The Court therefore found that the lease, on its proper construction, demised only the ground floor flat and not the basement.

When construing the lease, the court also considered whether the right to buy notice which described the property as a ground floor flat, being an extrinsic document and part of the process which led to the creation of the lease, could be relied upon as an aid to construction of the registered lease. The judge found that the right to buy notice was not determinative and could not be relied on to resolve the ambiguity as it was not a publicly accessible document.

2. The rectification question

Schedule 4 of the Land Registration Act 2002 gives the Court and the Registrar power to alter the Land Register for the purposes of correcting a mistake. However under paragraph 3 of Schedule 4:

• No order may be made to rectify the Register without the registered proprietor’s consent if the land is in the registered proprietor’s possession (unless the proprietor has by fraud or lack of proper care caused or substantially contributed to the mistake, or it would for any other reason be unjust for the alteration not to be made).
• If the land is not in the registered proprietor’s possession, the Court or Registrar must make an order rectifying the Register unless there are exceptional circumstances which justify its not doing so.

1. Was the basement in Mr M’s possession?

Possession requires a sufficient degree of exclusive physical custody and control. In this case, the building caretaker visited the basement quite frequently to take meter readings, the lock to the basement belonged to the local authority, all residents of the building had a key to the basement in order to access the communal meters and Mr M had requested a new key from the local authority when he lost his own.

The fact that Mr M had used the basement for storage was insufficient to establish that it was in his possession and the judge went on to consider the next question.

2. Were there exceptional circumstances which justified a refusal to alter the Register?

Firstly, are there exceptional circumstances in the case?

The Court found that yes, there were exceptional circumstances in the sense that some of the case’s features were out of the ordinary: Mr M was an innocent party who had purchased the flat believing he would acquire the basement. The local authority had initially conditionally agreed to give permission for the basement to be developed. Mr M had spent about £8,000 and a significant amount of time on the development, having been encouraged by the local authority to believe that unconditional permission would be granted once he had obtained planning permission (which he had) and once the parties had agreed a premium (which they had).

If there are exceptional circumstances, do those exceptional circumstances justify not making the alteration?

The Court found that the exceptional circumstances did not justify a refusal to rectify the property register once other factors had been taken into account: No contractual agreement had been reached and basement works had not begun; it was unlikely that the local authority was solely responsible for the mistake in the Register; the local authority had been accessing the basement continuously over a long period of time; the agreement to split the flat into two was subject to contract; it was a commercial project and Mr M as a developer acted at his own risk pending a final agreement; the Court was not satisfied that Mr M had suffered disproportionate financial loss and Mr M had a claim for indemnity from the Land Registry under Schedule 8 which would compensate him for the majority of his losses; any development opportunities were limited by a covenant in the lease in any event.

Conclusion

It was held that the lease had only demised the ground floor and the Court ordered that the Land Register should be rectified to remove the reference to the basement.

Each case will be dependent on its own facts, however some practical points can be taken from this:

• In the purchase of a leasehold property, any ambiguity as to demise arising in the lease and/or the property register should be highlighted and dealt with as soon as possible and in any event before the exchange of contracts.
• Owners of land should be vigilant about any inconsistencies or irregularities in the Land Register whereby a rectification of the Register might be prevented if their tenant takes possession. In most cases where a tenant is in possession, rectification will not be ordered.
• A number of matters need to be ascertained at an early stage in a case involving a mistake on the registered title including establishing whether or not the registered owner is in possession.
• A person is entitled to an indemnity from the Registrar under Schedule 8 of the Land Registration Act 2002 for any loss suffered by reason of (among other things) rectification of the Register or a mistake in an official search, official copy or a copy document kept by the Registrar which is referred to in the Register. Whether this will adequately compensate a registered owner for their loss will go to the question of whether there are exceptional circumstances to justify a refusal to rectify the Register.