England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		The Royal Courts of Justice Strand London WC2A 2LL
		15th July 2015

MR ENGLEHART QC:

1. This is the trial of a preliminary issue in an action for professional negligence brought against a firm of solicitors. The claimants are the successors to a housing association, the Acton Housing Association Ltd. I shall refer in this judgment to "Acton" since the fact that the present claimant is the successor has no bearing at all on the issues before me. As I have already mentioned, the defendants are a firm of solicitors, who acted at the material time for Acton.
2. The case concerns a block of 33 flats in a building known as Stephenson House, Bletchley. The background to the issues before me, which turn on the application of the Land Registration Act 2002, are as follows. On 9 December 2005 the then owners of the building, Remitone Properties Ltd, entered into an agreement for a lease with Acton. I say agreement for a lease but I should have said an agreement for, in fact, 33 long leases. The purchase price was £3,730,540. However, it was an agreement which envisaged a delay between contract and completion. Completion was not to take place until 15 working days after Acton had received notice of practical completion of works to the flats which were envisaged. It was, effectively, a building lease, or building leases.
3. Under the agreement, however, Acton had to pay, and did pay, a deposit of £1.25 million. Shortly after the agreement for the leases had been made the defendant firm, the solicitors, caused a unilateral notice to be entered against Remitone's freehold title to the building.
4. However, on 17 May 2007, possibly inconsistently with the agreement for lease - I know not - Remitone granted a charge over its freehold title in the building to HSBC Bank Plc. Following the granting of this charge, and in order no doubt to protect its loan to Remitone, HSBC made an application on 12 June 2007 to the Land Registry to register its charge. Shortly thereafter, but within the priority period, the defendants then made an official search of the register on behalf of Acton, given that it was contemplated that leases would be entered into in implementation of the agreement for the leases. A certificate was issued by the Land Registry. That certificate said an application to register a charge in favour of HSBC Bank Plc had been lodged for registration on 12 June 2007 at 15:10:14 seconds, but the Land Registry was not yet in a position to approve it and complete the registration by entry in the register. Nevertheless, the pending application had priority over the disposition protected by this result. The pending application was HSBC's application to register its charge, and the result referred to was the result of the solicitors' search.
5. Following that, on 17 July 2007 leases of the 33 flats were in fact granted pursuant to the agreement for leases. Each lease created a lengthy term backdated to 1 January 2006. It is common ground that the leases were granted strictly in accordance with and pursuant to the agreement for leases. On 22 August 2007 a notice was registered against Romitone's freehold title in respect of HSBC's charge, Then, on 9 November 2007 a notice was registered against Romitone's freehold title in respect of the 33 leases to Acton. I understand that Acton remains lessee under 29 of those leases, but under four of them underleases have been created.
6. Acton makes a number of complaints against its former solicitors, the present defendants. I need not go into that, but one issue which arises fairly and squarely in the litigation is whether the charge in favour of HSBC has priority over the leases granted to Acton. It will be obvious, I say straightaway, that the leases themselves were registered in the Land Registry after the registration of HSBC's charge. Registration of the unilateral warning in respect of the agreement for the leases was however, of course, effected some considerable time before registration of HSBC's charge.
7. It is in that context that Master Bowles on 11 February 2015 ordered as follows: "The following issue be tried as a preliminary issue, namely whether the legal charge granted by Remitone Properties Ltd ('Remitone') to HSBC Bank Plc over its freehold interest in the building known as Stephenson House, Bletchley, MK2 2EW, ranks in priority to the 33 leases granted by Remitone to the claimant by reason of the matters pleaded in paragraph 9 of the defence." That is a reference to a plea made in the defence as follows. Paragraph 27:

"(1) The agreement was protected by the unilateral notice referred to in paragraph 17 (the UN);

(2) The actual interest created by the agreement ranked in priority to the application to register the charge and the charge once registered by reason of the UN;

(3) Since the leases were granted pursuant to the agreement the leases also ranked in priority to the charge by reason of the UN and the leases continue to have priority over the bank's charge;

(4) Although according to the claimant it is a term of the charge that Remitone cannot grant leases without the bank's consent (which is not admitted subject to production by the claimant of the mortgage conditions) that did not apply to the leases which Remitone was contractually obliged to grant pursuant to the agreement, the priority of which was protected by the UN."

(Quote unchecked)

8. The hearing of the preliminary issue originally came before Mr Alan Steinfeld QC, sitting as judge of this division, on 15 May of this year. The deputy judge immediately queried the position of HSBC Bank Plc. In the judge's view the bank should be a party to this action because the preliminary issue was going to determine whether or not its charge had priority over the 33 leases. Accordingly, he ordered that the hearing of the preliminary issue should be adjourned. In the meantime, notice was to be given to the bank, statements of case were to be served on the bank and the bank was to become a party to the hearing.
9. The solicitors for the claimant have fully complied with all the requirements that Mr Steinfeld QC made and the bank has indeed filed a witness statement. But in the event the bank has decided that it does not wish to participate in this hearing at all. It follows, as I understand it, that the bank will be bound by my ruling on the preliminary issue. It has had every opportunity to make submissions but it has decided, no doubt for reasons of expense, not to take part.
10. Put shortly, the issue for me is whether the notice of the agreement to grant leases in the Land Registry gives priority to the leases subsequently granted pursuant to the agreement. For the defendant, Mr Denehan submits that the charge, that is the bank's charge, has priority over the leases. Of course, the actual leases themselves came subsequent in time. He makes, broadly, two submissions after referring me to the statutory scheme to which I will come in one moment. Mr Denehan's first submission is that one has to divorce the equitable interest arising from the agreement from the legal interest arising under the leases. They are different interests. One takes effect in equity and the other takes effect in law. He is not suggesting for one moment that the equitable interest has somehow been defeated by the bank's charge, but he says the legal interest arising from the leases takes effect subject to the charge.
11. The second submission Mr Denehan makes is that these 33 leases were void as against the bank because Acton did not have the consent of the bank before entering into the leases themselves. He refers me in that context to clause 9 of the bank's mortgage conditions which provides as follows: "You must not, without the bank's written consent, (1) agree to or give any licence or tenancy affecting the property; […] (3) in any other way, either create or dispose of, or agree to, any legal estate or legal or equitable interest in the property." It is quite plain under the conditions of the bank's charge that a mortgagor has to seek the bank's consent before entering into leases.
12. In his submissions he refers me to the certificate, the terms of which I have already recited, and he says that there we have the Land Registry saying these leases are going to be subject to the charge, since an application to register the charge is pending. He submits that that accurately shows the position. The second submission, as I have said, concerns the conflict between clause 9 of the mortgage conditions and the entry into these leases pursuant to the agreement. Mr Denehan refers me to certain authorities, particularly an extract from Fisher and Lightwood, which says as follows: "the mortgagor is unable to confer upon another a greater right he himself possesses. Thus, in the absence of a statutory express power of leasing, where, after the mortgage, the mortgagor purports to grant a lease without the permission of the mortgagee, the tenancy will subsist by estoppel between mortgagor and tenant but be void against the mortgagee."
13. He also refers me to authorities which support the fact that a lease entered into in breach of a mortgage covenant not to grant a lease is unenforceable or void as against the chargee. It is perfectly valid and binding as between the immediate parties but is of no effect vis-à-vis the chargee. He refers me to Dudley & District Benefit Building Society v Emerson [1949] Ch 707, in which it was said at page 714 by the Master of the Rolls, Lord Evershed:

"I am content to take the language of Lord Selborne, the Lord Chancellor, in the case of Corbett v Plowden: If a mortgagor left in possession grants a lease without the concurrence of the mortgagees (and for this purpose it makes no difference whether it is an equitable lease by the agreement under which possession is taken, or a legal lease by actual demise) the lessee has a precarious title, inasmuch as, although the lease is good as between himself and the mortgagor who granted it, the paramount title of the mortgagees may be asserted against both of them."

14. He also refers me, without taking me to any particular passages, to the case of Britannia Building Society v Earl [1990] 1 WLR 422, and also, although the case on the facts goes the other way, Barclays Bank Plc v Zaroovabli [1997] (Ch) 321. In summary, the essence of his submission is that the equitable interest conferred by the agreement and the legal interest conferred by the leases are different interests and have to be treated separately, and the validity of each has to be tested by different considerations.
15. For the defendant firm, Mr Rosenthal submits that there are oddities arising with the claimant's case. Those oddities are that the unilateral notice, which was undoubtedly given in respect of the agreement for the lease, would simply confer no protection at all as far as the claimant is concerned. He points out that it is conceded by Mr Denehan that a purchaser from Remitone, if there had been one, would have been bound by the agreement and would thus have had to grant the leases which Remitone came to grant, and he submits that a mortgagee like HSBC can be in no different position for the purposes of the Land Registration Act. He also points out that if, for example, the bank as chargee were to take possession of the building and forfeit the mortgagee's legal estate, it would also be bound by the agreement. Therefore, it is submitted that the position is that the agreement is what is binding on the bank and has priority over the bank's charge.
16. In support of his submissions, Mr Rosenthal refers me to an extract from Megarry & Wade, to the case of Williams v Burlington [1977] 121 Solicitors Journal 424, a case to which I shall refer in one moment, and to the Law Commission Report, command paper no. 271. That was a report laid before Parliament and entitled Land Registration for the 21^st Century: A Conveyancing Revolution, Land Registration Bill and Commentary. That was the report that preceded the passing of the Land Registration Act.
17. He submits that we have here a position in which the nature of the rights granted under the agreement for the lease is exactly the same as the nature of the rights which were granted under the leases. Therefore he submits the priority goes to the agreement and the product of that agreement, albeit that the product came later in time in terms of registration than the charge.
18. As far as the second point is concerned, Mr Rosenthal was fairly brief in relation to it. He submits that the mortgage deed – that is, an agreement between the bank and the mortgagor, Remitone – cannot remove the protection of an earlier agreement made between Remitone and a third party. That, as a bald statement, is no doubt correct, but there is force, it seems to me, in Mr Denehan's observation that the mortgage deed did not for one moment seek to undo the contract previously entered into and under which the equitable interest had been created. But Mr Rosenthal says that Remitone was already bound by the agreement prior to the creation of the charge and the requirement for consent under clause 9 of the mortgage deed cannot and did not arise here, because Remitone was already bound by the agreement for the leases.
19. In relation the note that appears on the registered title of the leases, he draws my attention to guidance of the Land Registry which shows that it is a relatively mechanistic note and he invites me to say that the fact that the Land Registry saw fit to enter a standard form wording on the register that cannot be determinative of the preliminary issue before me.
20. Against those submissions, I have now to provide my view on the preliminary issue, and I say straightaway that in my view the arguments of Mr Rosenthal are to be preferred. I say that for the following reasons. Firstly, it seems to me as a practical matter very likely that the bank searches prior to entering into their charge would have revealed the unilateral notice. But secondly, and more importantly, if the claimants are correct there would be no protection at all which a prospective lessee could achieve when entering into the agreement for a lease. Mostly an agreement for a lease is hotly followed by a lease itself and that creates no problems. But here we are in a position in which an agreement for a lease was envisaged to be inchoate, if I may put it that way, for quite a lengthy period during the carrying out of building works; and if the claimants are correct the consequence would be that there is nothing that the prospective lessee can do to protect himself.
21. It is said by Mr Denehan that the protection is that you do a search before entering into the leases and when you get a warning light from the Land Registry you do not complete. That is all very well, but in the present case, of course, the claimants have paid £1.25 million to Remitone. It seems to me that it is precisely in order to protect that £1.25 million that the registration of the agreement takes place.
22. Thirdly, it seems to me that, if Mr Denehan is right, the unilateral notice is a pointless affair, except perhaps to ensure that an agreement would be binding on a subsequent purchaser of the legal estate; but it would seem to have no useful purpose otherwise. If I may turn now to the statutory scheme, under the Land Registration Act 2002 I was referred to section 27(1), and that makes it plain that:

"If a disposition of a registered estate or registered charge is required to be completed by registration, it does not operate at law until the relevant registration requirements are met."

Mr Rosenthal points out that that is a section which does not deal with competing interests, rather it is setting out when an estate takes effect at law, and it is sections 28 and 29 which are of absolute materiality in the present dispute.

23. Section 28 provides the basic rule:

"(1) Except as provided by sections 29 and 30, the priority of an interest affecting a registered estate or charge is not affected by a disposition of the estate or charge.

(2) It makes no difference for the purposes of this section whether the interest or disposition is registered."

24. That section therefore preserves the basic rule of estates ranking in order of time, but makes exceptions which arise under section 29 and 30, exceptions which usually will govern a case in practice. Section 29 is the material section for present purposes:

"(1) If a registrable disposition of a registered estate is made for valuable consideration, completion of the disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority is not protected at the time of registration.

(2) For the purposes of subsection (1), the priority of an interest is protected—

(a) in any case, if the interest—

(i) is a registered charge or the subject of a notice in the register"

25. The question here is whether the priority of the agreement was protected at the time of registration, and it is to be noted that the priority of an interest is protected in any case if the interest is the subject of a notice in the register. Here, of course the agreement was the subject of a unilateral notice in the register.
26. Both counsel very fairly acknowledge that there is no authority directly in point. But I agree with Mr Rosenthal that such authority as there is tends to suggest that his arguments are correct. I refer firstly to the case of Williams v Burlington Investments Ltd [1977] 121 Solicitors Journal 424 to which I have already made reference. That is only reported in a fairly abbreviated form in the Solicitors journal, but Mr Rosenthal has procured from the library the transcript of the speeches, and in particular the speech of Lord Russell. The facts are fairly complicated and I need not go over them, but it is to be noted that the following passages appear in Lord Russell's speech. Firstly, at page 3 he says:

"Reverting to special condition 50, this is a contract by the purchaser to create in future on request by the vendors a legal charge and so much of the defined land should not at the time of the request have been sold. The charge to secure inter alia any extra sale price that might become due under special condition 13 on the purchaser obtaining planning permission. There is however provision giving the purchaser the right to create a charge on the land ranking ahead of the vendor's rights and it will raise money for developing the land. The purpose is only for this set of appeals (?). It is agreed that the respondent cannot rely on that provision."

(Quote unchecked)

27. The passage which assists on the point before me is to be found on page 6, where Lord Russell said:

"Accordingly, at this stage I conclude that when the respondent acquired its legal charge it did so subject to the appellant's rights to call in due course for a legal charge by reason of registration under the Land Charges Act 1925 of the 1971 Contract, of which indeed the respondent had also actual notice. The legal charge in favour of the appellant being the outcome of such rights has priority, though later in time over the respondent's legal charge."

(Quote unchecked)

28. I take on board entirely that that was a case concerned with a different regime; that is the Land Charges Act 1925, and indeed with unregistered land. It is therefore certainly not directly in point, but the principle to which Lord Russell refers seems to me to have comparable application in the present circumstances as it does in those circumstances. I have also been assisted by an extract from Megarry & Wade, The Law of Real Property, 8^th Edition, where it is said at paragraph 17/057:

"The grant of a lease creates a legal estate good against the world. A contract for a lease creates only an equitable interest, namely the right to the actual remedy of specific performance. As an equitable interest, the contract for a lease is vulnerable against third parties in both registered and unregistered land and its proprietary effect would largely depend on whether it had been entered on the appropriate register. [I interpose to say it has here] In practice, agreements for a lease, especially for short terms, are often not registered, even though this may leave the tenant with no remedy but an action for damages which is often worthless, if the landlord later grants another lease of the land or sells or mortgages it. Indeed, as the tenant is under no duty to register it, it is in the interest of the landlord to see that the agreement is registered. It is obvious that any risk of a damages claim against the landlord should he make some subsequent disposition to a third party that was intended to take effect subject to the tenant's interest, which in fact (…reading to the words…) because it was not registered."

(Quote unchecked)

29. It seems to me again that the indications of that passage are that the authors were assuming that, if a contract for a lease was registered, there would be protection although there would be no protection if it were not registered.
30. Finally, I come to a third item which is put before me by the claimant. It is a passage in the Law Commission Reports to which I have already referred. At paragraph 7.14 it is said:

"The effect of one, so far as relevant here, is that on registration a registered chargee will only take subject to a prior charge if it is either a registered charge or the subject of a notice on the register. If, for example, (1) A contracts to lend money to B on the security of a charge over B's registered land and protects that estate contract by the entry of a notice on the register. (2) B then charges the land to C, who registers his charge. (3) pursuant to the earlier contract, B executes the charge in favour of A, which is completed by registration, A's registered charge takes priority over C's even though C's was registered before A's. A's charge gives effect to a contract that was binding on C."

(Quote unchecked)

31. Then there is footnote 54, which refers to the case of Williams v Burlington Investments Ltd that I have already mentioned. It notes that the same result occurred in the analogous case with unregistered land. But the authors of the Law Commission Report consider that the same result would probably be reached with registered land under the present law, and they go on to say that the bill, which subsequently became the Land Registration Act, places the matter beyond doubt.
32. In relation to the two points raised by Mr Denehan, in what I must say was a most attractive argument, it seems to me that a clear distinction between the agreement for the leases and the leases themselves is rather artificial. The latter are the product of the former. In my view, so long as the leases themselves strictly conform to what the agreement for the leases provides, it is wrong to make a distinction between equity and the law in the way that Mr Denehan does. In the result, I will answer the preliminary issue in the negative.