Mind the gap
Recent delays at the Land Registry in processing applications have posed a tricky question for lenders financing the acquisition of registered real property: on enforcement of an unregistered legal mortgage against an unregistered proprietor, would a lender be able to exercise its power of sale in relation to the legal title?
We encountered this issue on a recent transaction where our client was advancing a short-term secured loan to refinance the acquisition of a portfolio of properties. Our due diligence revealed that the expected time for registration of the borrower's title to the portfolio was potentially several months due to a large number of prior applications relating to underlying occupational leases. Registration of our client's charge could take even longer.
Lenders are generally comfortable with a brief delay between the acquisition of a property by a borrower and the registration of their charge – clear priority searches are usually a condition precedent to funding so lenders can see how many prior applications are pending. A gap of several months caused by a backlog of applications is much more concerning. For a short-term secured loan, it may be a significant credit issue. The risks are greatest on a refinancing of a recent acquisition, where the lender has not enjoyed the comfort and visibility of its lawyers reviewing the seller's title during the acquisition due diligence or the borrower's post-completion applications – which on drawdown will be waiting in the queue at the Land Registry.
Key to understanding the "registration gap" is the distinction in English law between legal and equitable title to property. Under the Land Registration Act 2002, legal title to registered land passes when the transfer is registered with the Land Registry. Until that time, the owner holds equitable title only. Similarly, an unregistered legal mortgage takes effect as an equitable mortgage until it is registered.
Despite not yet being the registered legal proprietor, an owner who wishes to sell the legal title before registration is complete (for example where they are flipping a property) can do so thanks to sections 23 and 24 of the Land Registration Act 2002. Under sections 23 and 24, a person who is entitled to be registered as the proprietor may exercise the "owner's powers" in relation to a registered estate as if he or she were the registered proprietor.
A lender benefiting from an unregistered mortgage granted by an unregistered owner is, however, one step removed from these "owner's powers", and there is no clear authority that such a lender can benefit from them. A mortgage is itself a disposition of title and, under the common law principle of nemo dat quod non habet, a person cannot grant a greater interest than he or she possesses. Until the borrower's title is registered, there is a danger that the lender's mortgage may only allow the lender to exercise a power of sale in relation to the equitable title. Potential buyers are likely to be wary of a lender selling without full legal title, adding further uncertainty and complexity to enforcement.
Recent case law has shown that, notwithstanding the land registration regime, a mortgagee under an unregistered charge (Swift 1st Ltd v Colin [2012] Ch. 206) or the equitable assignee of a registered charge (Skelwith (Leisure) Ltd v Armstrong [2016] 2 WLR 144) may benefit from a power of sale of legal title conferred under section 101 of the LPA 1925 by virtue of their right to "receive and give a discharge for the mortgage money" (section 106).
In both cases, however, the borrower granting the charge was the registered owner. Where the borrower is still unregistered, sections 101 and 106 of the LPA 1925 do not clearly provide a lender the power of sale of legal title. Furthermore, in Skelwith the Court reiterated the relevance of nemo dat to the statement under section 23 of the LRA 2002 that the owner's powers to make a disposition are those "permitted by the general law".
Skelwith is currently being appealed, and the Court of Appeal may take a different view of the interaction between nemo dat and "owner's powers" under sections 23 and 24. For the time being, however, the legal analysis is uncertain – as the Law Commission's recent Consultation Paper (227) stated, "clarity is needed".
The Land Registry has reported increasing application volumes, which property professionals have linked to high levels of development activity and a busy residential property market. If this level of activity is sustained or increased, with the backlog of work leading to further delays in Land Registry processing times, it is possible that this scenario will be litigated and we will receive specific judicial guidance.
Lenders do not want to be the first to decide the point in Court. Until the position is definitively clarified (or the legislation is amended), prudent lenders should look to identify potential registration delays as early in the transaction as possible to allow them to take a commercial view of the risks and seek additional comfort and credit support.