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The race to the registers revisited

18 July 05

The extent to which the "race to the registers" is an issue in current conveyancing practice

by Robert Rennie


1. Introduction

If there is any topic which has been done to death over the past decades it is the vexed question of the effect of delivery of a disposition. Historically at least a conveyancing transaction might be said to have been divided into three distinct phases: the contractual or missives phase; the title phase; and the settlement phase.

In many ways these divisions are now somewhat artificial given the practice which exists of the seller’s solicitor trying to force the purchaser’s solicitor to accept the title prior to conclusion of missives. The idea is to present the purchaser with a take it or leave it situation and to iron out difficulties before a contract is struck and arguments about who may or may not be in breach of that contract arise. This has brought us closer to the English system of exchanging contracts only when everyone is happy with the situation. Gone are the days when missives were concluded on the basis of an implied obligation to deliver a valid marketable title. It is not uncommon now to find the parties arguing/negotiating the terms of the missives right up to two days before the date of entry. Sometimes it is a question of who holds their nerve, especially in commercial transactions where clients are asked to take a view on one or more of the issues. The settlement phase simply involves, as we all know, delivery of a disposition in exchange for the price and then registration. The introduction of stamp duty land tax has of course meant some delay in the settlement phase. If for no other reason the questions of the race to the registers and priority of title now loom large.

2. The rights and obligations obtained

If one thing is clear it is that after conclusion of missives a purchaser only has a personal contractual right or ius crediti against the seller. Accordingly if the purchaser is foolish enough to pay any part of the purchase price after conclusion of missives but before a title is obtained, that purchaser only has a personal right against the seller should the seller become insolvent (Gibson and Hunter Home Designs Ltd 1976 SC 23). It is worth mentioning that in that case the purchaser was not wholly unprotected because the selling solicitors had granted a letter of obligation to deliver a disposition, something which would not happen today. There had been various cases in which it was held that the point of delivery was the point at which some right of ownership passed. It was, for example, the date of a gift for estate duty purposes (Thomas v Lord Advocate 1953 SC 151). Similarly the date of delivery has been held to be the appropriate date for determining whether or not a court has jurisdiction from the point of view of ownership of heritable property. In Gibson there are some dicta to the effect that delivery is the date at which ownership passes. One judge however did indicate that ownership did not actually pass until such time as the disposition was recorded or registered.

3. Sharp v Thomson

I will not take up much time in relation to this case. Suffice it to say that many described it as a disaster waiting to happen. Due to a failure in the purchasing solicitor’s office a disposition was not recorded after settlement. Receivers were appointed to the selling company and a floating charge granted over its whole property and undertaking crystallised. By statute this transformed the floating charge into a fixed security. The Court of Session held that delivery of the disposition did not afford any sort of property right, and the receiver’s fixed security took priority over the luckless purchasers and their lenders. The case was appealed to the House of Lords. It would be fair, I think, to say that the English judges did not understand how this situation could come about. The creditors were obtaining some sort of windfall benefit because of a technicality. The two Scottish judges, Lord Jauncey and Lord Clyde, were the only judges who wrote speeches. The decision was reversed. The two speeches are not identical. Lord Jauncey adopts a broader approach, indicating that although ownership depends on registration, some sort of beneficial interest in the property or, if you like, ius ad rem passes on delivery and that right was enough to defeat the receiver. Lord Clyde restricted himself to an interpretation of the companies legislation, holding that the definition of “property” need not be a universal one and that for the purposes of a floating charge once a company had been paid for a property and handed over a disposition that property ceased to be part of the property and undertaking of the company. This was to adopt a company law rather than a property law interpretation.

To say that the decision caused a stir in academic circles is an understatement. It appeared as though I alone welcomed the decision. Most academics felt that Scots law had suffered a grievous injury at the hands of the House of Lords. There was concern over the faith of the registers. How many unrecorded dispositions might be lurking around? There was scope for fraud and double sales. Would it ever be safe to buy from a receiver again? Would the receiver know whether the company had actually delivered a disposition which was unrecorded?

4. Burnett’s Trustee v Grainger

Many people were content to regard Sharp v Thomson as a decision which was restricted to a competition between a purchaser with a delivered but unregistered disposition and a receiver under a floating charge. However in Burnett’s Trustee v Grainger 2000 SLT (Sh Ct) 116 the sheriff principal at Aberdeen held that Sharp v Thomson had a wider application. He took the view that delivery of the disposition to a purchaser from an individual created a beneficial interest which was sufficient to defeat the seller’s trustee in bankruptcy who had registered a notice of title prior to the disposition being registered. The matter was referred to the Scottish Law Commission who produced a discussion paper on Sharp v Thomson in July 2001 (Discussion Paper no 114). Burnett’s Trustee v Grainger was then appealed to the Inner House (2002 SC 580; affd [2004] UKHL 8), which reversed the sheriff principal’s decision, holding that Sharp v Thomson only applied in the restricted circumstances of a floating charge and that there was no such thing as a beneficial interest which transferred on delivery. Ownership was indissoluble and it arose only on registration of the disposition. Sharp v Thomson was distinguished to much academic acclaim.

5. The effect of land registration

There has always been some tension between what lawyers might regard as property law proper and registration law. This arises because the act of registration provides a statutory indemnity, and subject to the exceptions contained in section 12 of the Land Registration (Scotland) Act 1979 the registered proprietor’s title is good against everyone, no matter what defects there may have been in the pre-registration deeds. Rectification of the Land Register is not normally possible against a proprietor with a registered title who is in possession unless the defect in title has been caused wholly or substantially by the fraud or carelessness of the proprietor in possession. Section 4(1)(a) of the Abolition of Feudal Tenure etc (Scotland) Act 2000 provides quite specifically that ownership passes in the case of a transfer registrable under section 2 of the 1979 Act on registration in the Land Register. Where the conveyance is to be recorded in the Register of Sasines the same Act provides that ownership passes on recording in that register (section 4(1)(b)). One should therefore not be surprised at the decision of the House of Lords in Burnett’s Trustee. Where perhaps I take issue with the decision is in regarding it as a purely property law matter. The law of insolvency has always contained special discretionary or, dare I use the word, equitable principles. A trustee in bankruptcy takes the title of the bankrupt tantum et tale and subject to such things as latent trusts (Heritable Reversionary Co v Millar (1892) 19R (HL) 43). This is now enshrined in the bankruptcy legislation. Indeed the Heritable Reversionary case was used by the Scottish judges in the House of Lords in Sharp v Thomson to justify their decision. It has never seemed particularly odd to me to have special rules in insolvency situations which preclude a trustee, liquidator, receiver or administrator from having a windfall which could only come to the bankrupt or insolvent entity if they had committed fraud.

6. Where are we now?

Apart from competitions with the holders of floating charges it seems clear that a purchaser does not have a real right good against a trustee in bankruptcy or a liquidator until such time as the purchaser’s title has been registered in the Land Register. Delivery of a disposition will only operate to transfer the existing personal right of action contained in the missives. This gives solicitors certain problems in practice.

7. Letters of obligation

In a registration transaction the solicitor’s letter of obligation covers a period of days from the date of the last search report. The period is generally 14 days from the date of settlement. This period is supposed to be sufficient time to complete the testing clause, submit an SDLT form and receive the appropriate certificate, and then forward the necessary documentation including the disposition and SDLT certificate to the Land Register. The decision in Sharp v Thomson and of the sheriff principal in Burnett’s Trustee removed much of the risk from solicitors. The appeal decisions in Burnett’s Trustee do impose additional risks. It is fair to say that these risks are covered by the Master Policy. Nevertheless there remains the age old question of why the legal profession or their insurers should provide purchasers with this sort of cover. In any event letters of obligation do contain time limits.

8. SDLT forms

I do not need to tell of the difficulties which the introduction of SDLT has caused. There have been of course many cases where the appropriate SDLT certificate has not been returned within the 14 day period contained in the letter of obligation. In such a case the purchaser appears to be completely unprotected should the seller become insolvent and the appropriate liquidator, administrator or trustee be appointed. This is unsatisfactory for all concerned. I do not know whether a purchaser could sue the Revenue authorities if it could be shown that through a fault at the SDLT office a title could not be registered in time. Let us hope it is not put to the test.

9. Trust clauses

Trust clauses or small deeds of trust were first introduced at the suggestion of the Law Society of Scotland at the time when the Stamp Office and the Department of the Registers were on strike. Deeds could not be stamped nor could they be recorded or registered. This was well before Sharp v Thomson. The point of the deed of trust was to create a Heritable Reversionary v Millar situation which would protect the purchaser against an insolvency practitioner of the seller. Many firms still incorporated a deed of trust provision in missives and in the disposition after Sharp v Thomson, and many more included such a condition following Burnett’s Trustee v Grainger. These clauses have been criticised on a number of occasions (see A J M Steven and S Wortley, “The Perils of a Trusting Disposition”, 1996 SLT (News) 365; contrast J Chalmers, “In Defence of the Trusting Conveyancer”, 2002 SLT (News) 231). The criticism has been largely based on a failure to appreciate the legal consequences of creating a trust. Admittedly the trust should only last until such time as the disposition is registered. It is perhaps unsatisfactory that the profession should have to look at artificial solutions to solve what to the man in the street would appear a simple problem. After all you pay the price, you get the deeds and the registration is a formality which cannot be interfered with by the seller in the normal course of events. Why do these risks arise?

10. Priority of search

There is no problem of this type in England and Wales because there is a safe period within which no insolvency practitioner can obtain a better title than the purchaser. Effectively this period is what is covered by letters of obligation in Scotland. The Scottish Law Commission’s proposals are to allow a purchaser a similar period within which to register a deed where the deed is a dealing for value and the purchaser is unaware of any sequestration. The proposal in the case of personal bankruptcy was for a safe period of 21 days from the date of registration of the first order of the sequestration in the personal register. Similar provisions were proposed in respect of liquidation. This legislation is now urgent and there is a suggestion that it may be introduced as part of a forthcoming insolvency bill. Until then we must all take care.

Robert Rennie is Professor of Conveyancing at Glasgow University and a partner in Harper Macleod LLP