Back to Basics: Securing the gap

Helen Burns outlines the problems for lenders arising from registration delays. The coronavirus pandemic has caused a lot of changes, both globally and to everyday lives. But one thing that it has not changed is delays in registration of property transactions with the Land Registry. In fact, the effects of the pandemic have exacerbated existing delays, resulting in registration backlogs that are now extending past a year in some cases – a situation made even worse by the high volume of transactions completed before the stamp duty land tax holiday ended.  Because of the requirements of the Land Registration Act 2002, there are numerous transactions that pass through and are processed by the Land Registry. While applications can be submitted online to cut down on some processing and paper-management time, this does not decrease the number of applications that need to be managed. Historically, we could assume that first registrations, as well as transfers and leases of part, would take several months to register, with other, more straightforward transactions taking a few weeks or months, depending on requisitions. But now we face increasing uncertainty on when (and if) transactions will be registered, which ultimately affects how a property can be transacted during the registration gap. This article focuses specifically on issues arising for lenders during the gap. Registration basics The Land Registration Act 2002 was intended to ensure the creation of a single complete and comprehensive register of property information. First registration is triggered by any transfer of freehold land, the grant of a lease of more than seven years (or the assignment of a lease with more than seven years left to run) and any grant of security. Any subsequent transactions affecting the grant or disposal of an interest in property must also be registered. The 2002 Act sets out clear rules around what third-party rights can be protected, reducing the number of unregistered overriding interests that can potentially affect a property and, as a result, the risk of unknown interests adversely affecting the use and occupation of property. The registration gap Definition: the period between when a land transaction is completed and the date on which the transaction is registered at the Land Registry. Brown & Root Technology and another v Sun Alliance and London Assurance Co [1997] 1 EGLR 39 considered the effect of the registration gap in the context of the assignment of a lease. Here, a registered lease contained a break clause, the benefit of which was expressed to end when the lease was assigned. An assignment of the lease took place but was not registered. The original tenant subsequently sought to exercise the break clause, but the landlord disputed its right to do so. The Court of Appeal held that the original tenant could still validly exercise the break clause, even though since the date of the assignment the assignee had been invoiced for and paid the rent. The reasoning here was that the “assignment” referred to in the lease was construed to be a “legal assignment”, which would only be concluded on registration of the assignment at the Land Registry and the assignee being the registered owner of the legal estate. Although the case was decided under the Land Registration Act 1925, the relevant provisions are replicated in the 2002 Act and therefore the basic rule still applies. Legal v beneficial interests During the registration gap: 1. The legal estate in property remains where it started. That is, with the person that held the relevant legal interest in the property immediately prior to the relevant transaction, ie a seller in the case of a transfer, or a landlord in the case of a lease. 2. The beneficial interest in the property passes. So, while a seller remains the legal owner of a property, the buyer is the beneficial owner. But what about the lender? The majority of property transactions involve a lender, so how does the registration gap affect the ability to grant and take security over a property? 1. A legal charge can be validly executed during the gap. Under sections 23 and 24 of the 2002 Act, a person who is entitled to be registered as proprietor may exercise the owner’s powers in relation to the registered estate as if they were the registered proprietor, so it is possible for a buyer to exercise a charge in favour of a lender during the registration gap, even though the registered title remains with the seller.  Fortunately for lenders, there is also case law that supports the valid execution of a legal charge in favour of a lender by a buyer, even where the transfer to the buyer was never completed by registration (Bank of Scotland plc v King [2007] EWHC 2747 (Ch); [2008] 1 EGLR 65), although this is noted to be an unusual decision that appears to contradict Brown & Root. 2. And now for the equity. It is a basic rule of law that a party cannot grant an interest greater than it already has.  During the registration gap, a buyer only has a beneficial interest in the property. Therefore, it can only grant security over this beneficial interest. So, until registration, any charge will be equitable only. A charge will only take effect as a legal charge when the charge itself is registered.  Enforcement of the lender’s security Because of the length of time that registration is taking, it is a real possibility that a buyer could default on a secured facility before its purchase and the charge of that property is registered.  A lender takes a charge over property to protect its position if the buyer fails to pay the lender the amounts that it is owed when they fall due. Section 101 of the Law of Property Act 1925 grants a lender with the benefit of a charge the right to sell the secured property in the event of default by the buyer. Super. But this assumes that the buyer is the registered legal owner, and that the lender has the benefit of a legal charge.  In the example given, we do not have either of these. We have a beneficial owner (not registered) and an equitable charge (also not registered). Power of sale and equitable charges The decision in Swift 1st Ltd v Colin and others [2011] EWHC 2410 (Ch); [2011] PLSCS 201 gets us part of the way there. Here, the High Court held that the power of sale arose under an equitable charge because the charge was made by deed and expressed to be by way of legal mortgage. Because these are the only requirements in section 101 of the Law of Property Act 1925, the fact that the charge had not been perfected by way of registration (per the 2002 Act) was irrelevant.  So, a lender with the benefit of an equitable charge can exercise the statutory power of sale. However, the lender’s power of sale will be exercisable only in relation to the beneficial interest in the property, because until the point it is registered as owner, that is the only interest in the property that the buyer is able to charge. Practically, this could limit the ability of the lender to sell the property until such time as the transfer to the buyer is registered, although the lender will still be able to sell that beneficial interest. However, this may have limited commercial value.  If the buyer is never registered as owner, the lender would have to seek to rely on the decision in Bank of Scotland to have its security registered against the seller’s legal title to the property and then seek to exercise its power of sale against the seller. This is not an ideal situation for a lender who will, by this point, be looking for a quick exit from the property to try to recoup its funds as soon as possible. Bridging the gap? The risks of the registration gap will persist for lenders while the delays in registration continue, but what can be done practically to try to reduce these? 1. Expedition: Applications can be made to the Land Registry to expedite pending applications. The Land Registry has a discretion as to whether or not to action requests to expedite, which must be submitted with evidence that the delay in registration is adversely affecting another transaction involving the property.   Where a transaction is contemplated, this evidence should be easy to supply, but remember that an expedited dealing does avoid possible requisitions, which may still be raised by the Land Registry and which should be dealt with as usual. Also consider the practicalities of expedition where there are a number of applications pending prior to registration of the underlying transaction at the Land Registry. If these are third-party applications, for example relating to unrelated transfers out of a larger title, no party to the subject transaction may have any interest in them or the land that is subject to those transfers in order to make a valid application for expedition. 2. Undertakings: If an application cannot be expedited and lending has to go ahead, undertakings can be obtained from the buyer’s solicitor to procure registration of the transfer to the buyer as soon as possible after completion of the security. This imposes a further obligation on them to endeavour to complete the registration as soon as possible and is within their control. Undertakings are, however, only as useful as they are specific and enforceable and may be resisted by the other solicitor. 3. Other security: Is any security being taken, other than the legal charge, that will give the lender comfort of being able to recover its funds in the event of a default by the buyer before registration takes place? For example, in standard debenture security, a general covenant is given by the borrower that it is the legal and beneficial owner of the charged property. The fact that this will not be the case on completion will constitute a day one breach of the security and therefore render the same immediately enforceable against the other assets of the borrowing entity. 4. Withholding funds: If a facility is intended to be drawn down in tranches, the lender can impose conditions on subsequent drawdowns giving it the flexibility to withhold payment of further advances until such time as the registration of the transfer and charge has been completed. This would limit the lender’s risk and exposure to the initial drawdown only and to the extent that the lender will agree further funding. Closing the gap? The registration gap is here to stay while backlogs are increased in a thankfully buoyant property market. Identifying issues early in a transaction that have the potential to exacerbate the problem, including long day lists of pending applications on a title being transacted, gives us the opportunity to mitigate any further delays and risks to clients, by always minding the gap.  Helen Burns is a partner at Brabners Next time in Back to Basics, we take a look at the fundamentals of adverse possession Photo © Philip Wels/Pixabay