When will the court refuse to grant rectification of the Land Register for mistake?

In Dhillon v Barclays Bank plc [2020] EWCA Civ 619, Mrs Dhillon sought rectification of the Land Register to remove a charge granted following a fraudulent transfer. The property was now worth over a million-pounds. The sum secured by the charge was over £600,000. The case was unusual as there had been an escheat of the freehold title and Mrs Dhillon had been granted a vesting order under s.181 of the Insolvency Act 1986 (although the Court of Appeal noted that it remained “unclear precisely how or why Mrs Dhillon was entitled to make the application or obtain the order in the first place” [para 41]).

Mrs Dhillon had been a secure tenant with the right of buy, but she could not afford the price of £167,000. In 2002 her husband forged her signature on two transfers; a transfer from the landlord into Mrs Dhillon’s name and a second transfer into the name of a company (“the Company”) he controlled. On the same day as the second transfer the Company charged the property.  Within a month the Company re-financed the property with a loan from Woolwich plc (now Barclays Bank). In 2006 the Company was struck off the register and the freehold vested in the Crown as bona vacantia. The Crown disclaimed the property on 21 January 2009 and the property escheated. Mrs Dhillon applied for a vesting order and on 21 October 2010 Master Moncaster ordered that there be vested in Mrs Dhillon “all the estate and interest which immediately prior to its dissolution was vested in [the Company].”

Mrs Dhillon then issued proceedings seeking the rectification of the Land Register to remove Barclays Bank’s charge.

Part of Mrs Dhillon’s case was that following the escheat, the previous freehold title had been expunged and she had a new freehold title. The Court of Appeal rejected this analysis; Mrs Dhillon had the equity of redemption vested in her and in effect stood in the Company’s shoes.

The Court of Appeal upheld the judge’s view that the Land Register should not be rectified because there were “exceptional circumstances” under paragraph 3(3) of Schedule 4 to the Land Registration Act 2002 which justified not doing so. As Coulson LJ explained [at para 73]:

“rectification of the Register would create a windfall for Mrs Dhillon. It would give her the unencumbered freehold of a million-pound property she had never owned and could never have afforded. She would be put in a much better position than she ever would have been in if the fraud had not taken place.”

That decision made it unnecessary to decide jurisdictional points taken by Barclays that arose because Mrs Dhillon was applying for rectification of the charge created by the Company but not the void transfer to the Company itself:

• Barclays contended that the removal of the charge would not constitute the rectification of the relevant mistake as the relevant mistake was the entry of the Company as the freehold proprietor and not the later entry of Barclays’s charge. The Court of Appeal acknowledged that the answer to point was “not straightforward” [para 27].
• Barclays argued that the doctrine of illegality as explained by the Supreme Court in Patel v Mirza [2016] UKSC 42 prevented Mrs Dhillon from making an application for rectification. Whilst she had played no role in her husband’s forgery, by trying to “wind the clock back to a point in time between the two fraudulent transfers” she was seeking to take advantage of the first act of fraud. The Court of Appeal considered that the interplay between the illegality principle and the Land Registration Act 2002 was not “clear-cut” but the underlying point Barclays made was relevant to the “exceptional circumstances” issue [paras 33-34].

A further point was taken by the Chief Land Registrar who contended that Mrs Dhillon’s application was not really an application for rectification but merely one for alteration. If the application was for alteration the Chief Land Registrar would not be required to indemnify Barclays if its charge was vacated. The alteration argument was that as Mrs Dhillon had been in occupation when the charge was granted she always had an overriding interest to alter the register and so the alteration of the register was not to Barclay’s prejudice and did not satisfy the definition of “rectification” in Sch 4(1)(b). However, given the failure of the appeal it was unnecessary to deal with this “potentially complex” point, not least because it had not been properly pleaded [para 88].