Mind the gap - overriding interests and overreaching

Following our previous article regarding the validity of a notice to quit served during the registration gap, the tricky issue of whether further dealings by a seller during the registration gap are binding on new owners has come under the spotlight.

The registration gap is a term which applies to a period between a buyer completing the purchase of a property and the buyer obtaining legal title by registering the transfer of that property at the Land Registry. During this period, the buyer will only hold a beneficial interest in the property with the legal interest transferring on registration. The buyer is typically protected by the usual practice of carrying out a priority search to protect the buyer (and any mortgagee) by allowing a fixed period for the buyer to complete his purchase and lodge his application without any concern that another party might in the meantime lodge another application with priority over his. However, if a buyer loses priority, any application ranking behind his will gain priority and will be next to be processed, and the buyer could find his property unexpectedly encumbered by something which occurred after he had completed his purchase. This is illustrated in the recent High Court case of Baker v Craggs [2016] EWHC 3250 (Ch) where the High Court has held that a right of way granted to a third party by a seller during the registration gap was effective and binding on a buyer who had lost priority at the Land Registry.

The facts

In this case, Mr and Mrs Charlton (the Charltons) owned a property called Waterside Farm in Somerset. They sold part of their property and the transaction timeline was as follows:

• 17 January 2012 - The Charltons completed a sale fields, barn buildings and an adjacent yard to Mr Craggs (crucially, without reserving any right of way over the yard). Mr Craggs’ solicitors lodged a Land Registry application within the applicable priority period.
• 09 February 2012 - The Charltons exchanged contracts with Mr and Mrs Baker for the sale of a farmhouse and a barn together with a right of way over the yard which had been sold to Mr Craggs.
• 20 February 2012 - The Bakers completed their purchase, and lodged their Land Registry application. The Bakers’ transfer was successfully registered at the Land Registry on 14 March 2012 and the register recorded that the land had the benefit of a right of way over the yard.
• 09 May 2012 - Due to an issue with the plan which was not satisfied, the Land Registry cancelled Mr Craggs’ application and he lost his priority at that time. The plan was subsequently sorted out and the application resubmitted, but the Land Registry registered the yard as being subject to the right of way granted to the Bakers.

Proceedings were issued on 26 March 2015, the principal question being whether the Bakers had a right of way over the yard owned by Mr Craggs or not. There was no doubt that the Bakers had achieved registration first, but did Mr Craggs’ interest in the yard take priority?

The Land Registration Act 2002 makes provision for the interest of a person in actual occupation, commonly referred to as an “overriding interest”. The parties were in agreement that unless Mr Craggs was in actual occupation of the yard at the time of the grant to the Bakers, he would be bound by their right of way. The Court therefore had to determine:

• first, was Mr Craggs was in actual occupation of the yard, and
• even if he was in actual occupation, had his beneficial interest nevertheless been overreached on completion of the sale by the Charltons to the Bakers?

Was Mr Craggs in actual occupation?

The Court concluded that Mr Craggs was in actual occupation of the yard. It was noted that actual occupation relates to physical occupation rather than a legal right. This physical presence involves "some degree" of permanent, continuous physical presence though this does not have to be by the person claiming actual occupation and can instead be, for example, a builder hired by a householder nor need it involve residence. The Court noted that any interest will only be protected to the extent of the area of which the person is in actual occupation and that for the actual occupation to be effective to override a disposition, a person must have been in actual occupation at the date of completion.

Since completing his purchase, Mr Craggs had been refurbishing the barn for use as stables and had visited the property more or less daily. While it appears he had in fact completed the refurbishment the day before the Bakers completed their purchase it was held that he had nevertheless continued to go there frequently to carry out other tasks. This was found by the Court to not to be just a “fleeting” use and satisfied the requirements for actual occupation even though Mr Craggs was not residing at the property. It was also noted that while Mr Craggs would only have been using the yard for access this was in conjunction with his use of the rest of the property and was sufficient to establish actual occupation over the yard. The judge noted that while "[M]ere use of an access… may not amount to occupation but, where a person using a drive owns it and the house it serves, it may be proper to consider him to be occupying both house and drive as an owner occupier".

Had Mr Craggs interest been overreached?

This finding meant that Mr Craggs would not be bound by the right of way unless the Bakers could suggest any other circumstances under which their right should take priority to Mr Craggs’, namely whether overreaching had occurred.

Overreaching is the process provided for in section 2 of the Law of Property Act 1925 whereby a conveyance to a purchaser of a legal estate can overreach an equitable interest affecting the same land if the completion monies are paid to at least two trustees. Overreaching can occur whether or not the purchaser of the legal estate has notice of the equitable interest. The Bakers were a purchaser of a legal estate for this purpose and, until Mr Craggs’ transfer was registered at the Land Registry he only held an equitable interest in the land he had purchased. In this case, the Bakers argued, and the Court accepted, that following exchange of contracts for each sale the Charltons were trustees for both the Bakers and Mr Craggs respectively until those transfers were registered. This created a situation which enabled the Bakers to pay the completion monies in respect of their purchase (including the right of way) to two trustees (the Charltons) which had the effect of overreaching any prior equitable interest, which of course included Mr Craggs interest. The consequence was that, despite Mr Craggs’ actual occupation of the yard, his beneficial interest was automatically overreached upon payment of the consideration by the Bakers to the Charltons. The Court agreed with this analysis and therefore held that Mr Craggs’ yard was subject to the right of way and that the entries on the respective titles at the Land Registry were correct.

Comment

The outcome of this case was the result of a series of unfortunate events from which a number of practical points can be taken, not least that the Charltons granted a right of way over land they had already sold. At first glance, Mr Craggs was unlucky. If the Bakers had paid their purchase monies to a single owner, overreaching would not have occurred and Mr Craggs’ overriding interest would not have been defeated. However, the case also highlights the importance of ensuring that all documents and plans are Land Registry compliant and ensuring that all parties involved in the registration respond quickly and substantially to any requisition or query raised by the Land Registry. If a satisfactory response is provided to the Land Registry within the time period given, priority will be preserved. If priority is lost, then the registration gap poses a risk to purchasers and mortgagees because subsequent applications (like the Bakers’) will achieve priority instead.