Don’t overreach – the Court of Appeal rules on the nature of legal estates in land in Baker v Craggs [2018] EWCA Civ 1126

The facts in Baker v Craggs were relatively unusual, but the legal issues that they threw up shone a light on fundamental concepts in registered land conveyancing. The vendor of land sold one plot to A, but omitted to reserve a right of way. There were problems with the registration of the plot and A lost the benefit of the priority period for his application for registration. The vendor then sold a second plot to B, purporting to grant an easement over A’s plot (which was now being held by the vendor on bare trust for A pending registration). B’s title was registered with the benefit of the easement. Did the grant of the easement to B overreach A’s interest? Or was A’s interest protected by his actual occupation of his plot, and could not be defeated by the subsequent grant of the easement to B?

The precise question for the Court of Appeal was whether the grant of an easement over land was capable of overreaching, and the equitable interest that was said to be overreached was the earlier sale of land to a third party which had not yet been registered following completion and after expiry of the priority period. The Court of Appeal had to grapple with a number of concepts vitally important to registered conveyancing, however, including overreaching, the nature of ‘legal estates in land’, and overriding interests, in circumstances where the judgment at first instance by Newey J (as he then was, now Newey LJ: [2016] EWHC 3250 (Ch)) had been subject to academic criticism. As Lewison LJ noted when granted permission to appeal, the decision raised an important question of interpretation of the Law of Property Act 1925.

What this briefing note sets out to do is to highlight the different concepts in play in the Court of Appeal decision in Baker v Craggs and how the law is now on a more familiar track than it was following Newey J’s decision.

The facts of Baker v Craggs

Mr and Mrs Charlton (‘the Vendors’) owned Waterside Farm in Somerset. The Vendors decides to sell two parts of the farm to separate purchasers, Mr Craggs (referred to as ‘A’ in Henderson LJ’s leading judgment, with which the other members of the Court of Appeal agreed) and to Mr and Mrs Baker (referred to as ‘B’).

The sale of the first part of the farm (including a yard) to Mr Craggs completed on 17 January 2012. It did not reserve a right of way in favour of the Vendors. Mr Craggs’ solicitors had undertaken a search at the Land Registry giving them the benefit of a priority period up to 28 February 2012. The solicitors lodged the transfer for registration on 10 February, but on 22 March the Land Registry noted a problem with the plan. A fresh application was submitted with an amended plan on 16 May 2012, and Mr Craggs was registered as the proprietor of the farm from 16 May. During the period between 17 January 2012 and 16 May 2012, Mr Craggs was not the legal owner of the farm; instead, the Vendors held it on a bare trust for him: section 27(1) of the Land Registration Act 2002 (‘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’; Scribes West Ltd v Relfa Anstalt (No 3) [2004] EWCA Civ 1744, [2005] 1 WLR 1847). He therefore only had an equitable interest during this period of time.

On 9 February 2012, the Vendors contracted to sell a barn at the farm to the Bakers. The sale purported to grant a right of way across the yard that had been included in the transfer to Mr Craggs. The sale was completed on 20 February 2012. This transfer was lodged at the Land Registry. The Bakers were entered on the register as the barn’s proprietors from 14 March 2012.

When Mr Craggs was registered as the proprietor of the farm in May 2012, the Land Registry recorded the property as subject to the rights granted in the transfer to the Bakers of the barn.

The proceedings raised the question of whether the Bakers had the benefit of a right of way over the yard at the farm.

Actual occupation and overriding interests

Section 29(1) of the Land Registration Act 2002 states that ‘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.’ The priority of an interest is protected in the circumstances listed in subsection (2).In Baker v Craggs, the Court of Appeal was concerned with subsection (2)(a)(ii), namely an interest that ‘falls within any of the paragraphs of Schedule 3’.

Schedule 3 recites those ‘Unregistered Interests which Override Registered Dispositions’. This list includes a number of interests such as leasehold interests of seven years or less in their length of term and customary rights; it also includes, at paragraph 2, ‘Interests of persons in actual occupation’.

Mr Craggs’ equitable interest in the farm was protected as an overriding interest as he was in actual occupation of the land: there was no appeal from this part of Newey J’s judgment. The question for the Court of Appeal was whether his equitable interest had been overreached.

Legal estates and overreaching

Overreaching was not introduced by the LPA 1925, the Land Registration Act 1925 or the Land Registration Act 2002; it is a much older concept. It is a process by which certain equitable rights in land that might otherwise have enjoyed protection by way of land registration on the occasion of a sale of that land are transferred to the purchase money that has been paid. At this point, the equitable rights have been overreached and no longer bind the purchaser. Equitable rights that exist behind a trust of land form the main category of those interests that are capable of being overreached. If the beneficiary’s rights have been shifted from the land to capital monies in the hands of the trustees, there is no longer an interest in the land to which the occupation can be referred: City of London Building Society v Flegg [1988] AC 54 at 91 per Lord Oliver.

Section 2 LPA 1925 deals with the concept of overreaching. Section 2(1) LPA 1925 sets out a number of circumstances in which a conveyance to a purchaser of a ‘legal estate in land’ shall overreach any ‘equitable or power affecting that estate, whether or not he has notice thereof’.

At first instance, Newey J held that the grant of the easement was a ‘conveyance’ for the purpose of section 2(1) and hence that that Mr Craggs’ beneficial interest had been overreached: [2016] EWHC 3250 (Ch) at [30], [41].

Henderson LJ disagreed with Newey J’s analysis by reference to fundamental conceptions in the Law of Property Act 1925 and land registration. Section 1(1) of the LPA 1925 made it clear that, for both registered and unregistered land, there are only two estates in land which are capable of subsisting or of being conveyed at law: (a) an estate in fee simple absolute in possession; and (b) a term of years absolute. Before the LPA 1925 there had been a number of other estates in law that had subsisted at law (e.g. fee tails and life estates). This was one of the most sweeping changes of the new 1925 regime.

There are other interests or charges in or over land which are capable of subsisting or of being conveyed or created at law: these are recited in section 1(2) LPA 1925, and include at (a) ‘an easement’. For Henderson LJ, by virtue of section 1(4), the two estates in land and the interests or charges in subsection (2) are together defined as ‘legal estates’.

Section 2(1) is confined to the purchasers of a ‘legal estate in land’; section 1(1) refers only to there being one two kinds of legal estate in law. ‘Accordingly, it would seem to follow that the doctrine of overreaching can only apply where such an estate in land is conveyed to a purchaser’ ([25], per Henderson LJ), and did not apply to the grant of an easement to a purchaser of land. The reasoning at [27] that this follows from the order in which the sections appear in the statute is perhaps a little inelegant, but the result is one that most commentators and practitioners would expect, as well as reflecting the preponderance of the case law.

Why legal mortgages overreach

Section 205(1)(ii) LPA 1925 contains a broad definition of conveyance, including a mortgage or charge. A charge is not obviously a legal estate in land within the meaning of section 1(1) LPA 1925. Henderson LJ explained how legal mortgages operate by reference to section 87 LPA 1925. This provides that a where a legal mortgage of land is created by a charge by deed expressed to be by way of legal mortgage, the mortgagee shall have the same protection as if it was a mortgage term by demise or sub-demise, hence as if it was a term of years absolute within the meaning of section 1(1)(b).

Unanswered question: estate contracts

At first instance, Mr Craggs had argued that he had the benefit of an estate contract. Newey J rejected the argument that this fell within the exemption from overreaching in section 2(3)(iv) LPA 1925: ‘benefit of any contract (in this Act referred to as an “estate contract”) to convey or create a legal estate’. Newey J rejected this on the basis it had merged with the transfer. This reasoning was criticised by Professor Martin Dixon (‘The registration gap and overreaching’, Conv. 2017, 1,1-5) on the basis that the contract for the grant of a legal of a legal estate was in existence until the legal estate was granted, that is, at the moment of registration. Regrettably, Henderson LJ expressed no view on the question. It is quite likely that the question is still open to another court: see Gwilym Owen, ‘Priorities and registered land during the registration gap’ Conv 2017, 3, 230-241 at 239-241.

Conclusion

What Baker v Craggs illustrates is that the registration gap does leave a purchaser vulnerable to dealings with the land pending registration. For example, in Stodday Land Ltd v Pye [2016] EWHC 2454 (Ch), [2016] 4 WLR 168, it was confirmed that only the legal owner of the reversionary estate could give a valid notice to quit in respect of a tenancy from year to year; the ‘new owner’, having only an equitable title during a ‘registration gap’ of a month, could not do so. The protection of an overriding interest by actual occupation reduces the dangers to an equitable owner during this period, but it does not remove them altogether.

There is a short moral of the story, however: to avoid the perils of protracted litigation, ensure that you send accurate plans to the Land Registry so as to avoid a requisition.

DAVID SAWTELL
JUNE, 2018
LAMB CHAMBERS

 

David is the co-author of our recently published ‘A Practical Guide to the Landlord and Tenant Act 1954: Commercial Tenancies’, about which you can find out more about and read a free sample chapter here.

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