Chancery law

By Dov Ohrenstein, barrister, 3 New Square, London

Fraud prevents transfer of equitable interestCollings v Lee & Another, The Times, 26 October 2000This appeal raised an important question concerning s.70(1)(g) of the Land Registration Act 1925, which provides that all registered land shall be subject to the overriding interest of persons in actual occupation.

The claimant had entrusted a Mr Lee with the sale of her home.

Mr Lee pretended that he had found a buyer but, using an alias, he fraudulently obtained a transfer of the property from the claimant to himself.

Mr Lee paid nothing to the claimant.

He then mortgaged the property to the Halifax and kept the proceeds of the mortgage.

The claimant claimed rectification of the land register against not only Mr Lee but also against the Halifax.

It was not in dispute that at the relevant time the claimant had been in occupation of the property.

The appeal solely concerned the question of whether or not the claimant would have, by reason of her occupation, an overriding interest binding on the Halifax under LRA s.70(1)(g).

At first instance it had been accepted by both parties that when the Halifax obtained their legal charge, the claimant had no equitable interest in the property, merely a right to set aside the transfer as against Lee.

The judge had decided that such a right could fall within the LRA s.70(1)(g).

On appeal the Halifax argued that a right to set aside a voidable transaction did not amount to a subsisting equitable interest in the property and was a 'mere equity' which can not be protected under LRA s.70(1)(g).

Contrary to the stance initially adopted by all parties, the Court of Appeal unanimously held that at all times Mr Lee had held the property on trust for the claimant.

He had been her agent and therefore owed fiduciary duties to her, not least to procure the transfer of the property to a third party for an agreed price.

It was decided that the registration of title in his name was not effective to transfer any equity in the property to him.

Therefore, since the claimant retained an equitable interest in the property she could rely on the protection of the LRA s.70(1)(g) to grant her an overriding interest.

This decision appears to conflict with previous authority such as Lonrho v Fayed [1992] 1 WLR 1, 11, which states that a contract obtained by fraudulent misrepresentation is voidable, not void, even in equity; and that until an election is made to rescind the contract, the representor is not a constructive trustee of the property and no fiduciary relationship exists.

However, the Court of Appeal decided to distinguish Lonrho both on the grounds that Mr Lee was an agent and acting as a fiduciary from the outset, and because the transfer of the property to him could be described as non-consensual in that it was never intended to sell the property to Lee.

The judgment therefore turns on the precise nature of the fraud perpetrated.

Non-consensual transfers and misappropriation of property by fiduciaries will be treated as void - unlike cases of fraudulent misrepresentation, which will result in merely a voidable transaction.

Since the Halifax's charge was registered and executed at a time when the claimant was in actual occupation of the property, the Court of Appeal considered it likely that if the Halifax had made enquiries of the claimant at that stage, then Mr Lee's fraud would have been exposed.

No such enquiries were made.

However, the Court of Appeal did not rely on that as a reason for finding in favour of the claimant.

By deciding this case purely on the narrow distinction between void and voidable transactions, the Court of Appeal was able to rule in favour of the claimant without deciding the difficult issue of whether a mere equity, such as a right to avoid voidable transfer of registered land, could be protected as an overriding interest under the LRA 1925 s.70(1)(g).

The Court of Appeal merely stated that there was 'a powerful argument' in support of the view that such a mere equity could not amount to an overriding interest.

This case will offer assistance to naive or gullible home owners who become victims of fraudsters.

However, lenders who - unlike home owners - will generally be powerless to protect themselves from such frauds will be dissatisfied with the decision.