Mortgage Fraud, Rectification and Indemnities: Tim Polli QC succeeds in the Court of Appeal

On 14 May 2020, the Court of Appeal handed down its judgment in Dhillon v (1) Barclays Bank plc and (2) the Chief Land Registrar [2020] EWCA Civ 619, dealing with mortgage fraud, land registration, rectification for mistake and indemnities. The Bank’s mortgage had been granted to it by a company that was, at the time, the registered proprietor of the Property. The mortgagor’s title was, however, the consequence of fraud by a third party and it ought never to have been registered as the proprietor of the property. Tim Polli QC had succeeded at trial, persuading the Judge not to remove the bank’s charge from the title. Mrs Dhillon appealed against that refusal but Mrs Dhillon’s appeal was dismissed.

The Court of Appeal concluded that the Judge was right to find that there were exceptional circumstances which justified not rectifying the register. Their Lordships acknowledged that the wider, jurisdictional issues raised by Tim on behalf of the Bank were not straight-forward but they concluded that it would be wrong to determine them given that they were immaterial to the outcome of the appeal. The decision might, however, provide a nascent solution to the problems caused by the so-called “right to rectify” with the availability of indemnities from the land registry in relation to rectification of the register.

The Facts

The facts are involved and unusual. The Appellant, Mrs Dhillon, had lived with her family in a house in East London (‘the Property’) since about 1989. She was originally a secure tenant of the local authority and, in time she acquired the Right to Buy the Property.  She commenced the process of exercising that right but, as far as she was concerned, she did not hear further from the Council. In fact, without her knowledge, Mrs Dhillon’s then husband fraudulently “hijacked” her application to exercise the Right to Buy.  He fraudulently induced the local authority to proceed with the sale, apparently to Mrs Dhillon, in the process forging Mrs Dhillon’s signature on the Deed by which she purported to receive the transfer. He then forged Mrs Dhillon’s signature on a transfer selling the Property to a company, CEL, which was acquiring it as a BTL investment. Completion of those transactions took place simultaneously in September 2002.  A month later, CEL mortgaged the Property to the Bank. At all material times, Mrs Dhillon continued to occupy the Property as her home. CEL thought that it had agreed a short-term tenancy of the Property with Mrs Dhillon.

In March 2003, Mrs Dhillon accompanied her former husband to Pakistan. She returned in about July 2003, having been informed by her eldest daughter that, in her absence, her possessions had been removed from the house and other people were now occupying it. Shortly after her return, she reported her husband’s fraud to the police.

CEL was dissolved from the Register of companies in 2005. The Crown disclaimed the freehold, which escheated.  Mrs Dhillon applied for a vesting order and, in October 2010, it was ordered that the estate and interest that had been CEL’s was vested in her name.

In 2015, Mrs Dhillon commenced proceedings against the Bank and the Chief Land Registrar seeking the removal of the Bank’s charge from the register.  Her case was that the effect of her former husband’s fraud was that both the acquisition from the local authority and the sale to CEL were void.  Consequently, she claimed that the transfer to CEL was a mistake within the meaning of paragraph 3(2) of Schedule 4 of the Land Registration Act 2002 and that she was therefore entitled to have the charge granted by CEL to the Bank removed from the title.  She argued that the Court could not go behind the vesting order granting the Property to her.

At trial in 2019, the trial Judge had concluded that the Court had jurisdiction to order the alteration sought by Mrs Dhillon but that, on the highly unusual facts of this case, there were “exceptional circumstances” why it should not do so. Mrs Dhillon appealed, her main criticisms of the Judge being that he:

• Wrongly equated her position with CEL’s position. She contended that the vesting order granted her a new freehold title which should be free of the Bank’s charge;  and
• Focussed too heavily on her circumstances and her claim to the Property, and therefore overlooked or gave insufficient weight to the following factors:
• • The Property had been Mrs Dhillon’s home for very many years;
  • As a mortgagee, the Bank’s interest in the Property was only financial;
  • There is nothing exceptional about a mortgagee losing a registered charge in the case of mortgage fraud; and, in any event,
  • If rectification was ordered, the mortgagee would be entitled to an indemnity from the Chief Land Registrar and so would not lose out.

The Respondents’ Notices

Tim Polli QC prepared a Respondents’ Notice for the Bank repeating two of the arguments he had advanced at trial.  First, he argued that the Court did not have jurisdiction to make the alteration sought by Mrs Dhillon at all because the operative mistake in this case was the replacement of Hackney as proprietor of the Property with CEL; and the alteration sought by Mrs Dhillon would not correct that mistake. Second, he argued that, by her claim, Mrs Dhillon was seeking to adopt and to benefit from the fraud perpetrated on Hackney by her husband and that the principle of illegality as explained in Patel v Mirza [2016] UKSC 42  [2017] AC 467 precluded her from doing so.

The Chief Land Registrar also filed a Respondent’s Notice, arguing that the alteration that Mrs Dhillon sought was not rectification at all (with the consequence that, if the alteration had been ordered, an indemnity would not have been available to the Bank). The Chief Land Registrar contended that, because Mrs Dhillon had been in actual and obvious occupation of the Property at all material times, her “right to rectification” constituted an overriding interest that took priority over the Bank’s charge (relying on that part of Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] Ch 216 that survived Swift 1^st Ltd v Chief Land Registrar [2015] Ch 602).  That meant that the bank’s charge was always vulnerable to Mrs Dhillon’s application to rectify the register;  and, because of that inherent vulnerability (and pursuant to Re Chowood’s Registered Land [1933] Ch 574) the removal of the charge would not be prejudicial to the Bank’s title and so would not be rectification.  Further, the Bank could not rely on paragraph 1(2)(b) of Schedule 8 to the Land Registration Act 2002 (as Swift 1^st had in Swift 1^st Ltd v Chief Land Registrar [2015] Ch 602) because CEL’s execution of the charge was not a forgery. For the Bank, Tim opposed that argument, contending that, insofar as the availability of an indemnity was relevant to the “exceptional circumstances” jurisdiction, the Judge was correct to conclude that the bank was, in principle, entitled to an indemnity.

The Judgment of the Court of Appeal

The Court of Appeal recognised the force in the jurisdictional issues raised by Tim in the Bank’s Respondent’s Notice but declined to decide any of the issues raised by them. They therefore proceeded on the assumptions (i) that the Court did have jurisdiction to order the alteration in order to correct a mistake in the register;  and (ii) that the principle of illegality did not preclude Mrs Dhillon from bringing her claim. They accepted, however, that:

“The inescapable fact that Mrs Dhillon is seeking to wind the clock back to a point in time between the two fraudulent transfers means that, inevitably, she is seeking to rely on the first act of fraud, namely the void Transfer 1, and it would be contrary to common sense, and any notion of justice, to consider the question of exceptional circumstances, and perhaps more particularly whether or not the non-rectification of the Register was justified, without having regard to that fact.”

The Court accepted Tim’s submission that the vesting order must have been made pursuant to s. 181 of the Insolvency Act 1986; and that the freehold title acquired by Mrs Dhillon pursuant to that vesting order was the same freehold title that had been owned by CEL. Mrs Dhillon therefore had the equity of redemption that had been CEL’s and the Judge had been correct at trial to proceed on that basis.

The Court then dismissed all the other criticisms of the Judge’s approach to the assessment of “exceptional circumstances”. In particular, the Court concluded that it was entirely appropriate for the Judge to focus particularly on Mrs Dhillon’s circumstances. Whilst the position of the Bank was entirely unexceptional, her circumstances were quite exceptional. Ultimately, the Court upheld the trial Judge for the reasons set out at paragraphs 70 to 75:

70. Of course, I acknowledge that the loss or potential loss of a charge in favour of a lender in good faith is not uncommon because of the unfortunate proliferation of mortgage fraud. But that would not be an accurate summary of the story here.  I agree with Mr Polli QC that it is wholly exceptional for such a loss to occur in circumstances where the occupier never owned the freehold of the property; paid nothing towards the property; could never have afforded to buy the property without immediately selling it; where the original conveyance to the occupier was void because it was procured by fraud; and that, if the Register was rectified, the occupier would become the owner of the unencumbered freehold as a result of that fraud.
71. In my view those are unusual and uncommon factors which are not routinely or normally encountered. There is no evidence to suggest that these circumstances are anything other than unique, or at least very rare. They are, on any view, ‘exceptional’.
72. Having reached those conclusions as to exceptional circumstances, do they justify the non-rectification of the Register? In my view, they do.
73. First, 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. In addition, I would repeat the point made in Section 5 above that, regardless of whether or not the claim should fail for illegality, Mrs Dhillon’s indirect attempt to rely on fraudulent Transfer 1 must at least be a relevant factor when considering whether the non-rectification of the Register is justified.
74. On the other hand, if the Register is not rectified then Mrs Dhillon would be in much the same position as she would have been in had she exercised her right to buy. In 2002, she would have had to have bought the property with a mortgage and then sold it, leaving her with an equity of redemption.  That is the position now, with the additional factor (in her favour) that the equity of redemption in 2002 would have been worth nothing like the £350,000 odd which it is now estimated to be.  Non-rectification therefore is amply justified: it is a just and proportionate outcome.
75. Accordingly, I consider that both stages of the relevant test have been made out in the present case. There are exceptional circumstances which justified the non-registration of the Register.”

Mrs Dhillon’s appeal was therefore dismissed.

That meant, of course, that the Court also did not have to determine the issues raised by the Chief Land Registrar as to the availability of an indemnity and so it did not do so.  However, shortly before the Appeal, Mrs Dhillon had sought to amend her Appellant’s Notice to rely on the fact that her “right to rectify” constituted an overriding interest.  Tim resisted that application for the Bank on the basis that (i) the issue had not been pleaded and advanced below, at trial; but also (ii) that it would make no difference because the “right to rectify” was simply a right to invite the Court to alter the register under and pursuant to the statutory scheme.  It did not circumvent the Court’s consideration of “exceptional circumstances”;  and nor could it circumvent the special protections provided in the land registration scheme to proprietors in possession.  On this point, the Court of Appeal agreed, commenting,

“Throughout all of that analysis I have not forgotten that, save for the period when she was in Pakistan, Mrs Dhillon has been in occupation of the property.  I accept too that that fact could have been ascertained by BB at the time of the mortgage (although it is difficult to see in practice what difference that would have made).  But that cannot give rise to any sort of overriding interest; certainly, it cannot give rise to an interest that somehow trumps all the other exceptional circumstances and justifies the rectification of the Register in Mrs Dhillon’s favour.”

If the “right to rectify” cannot be an overriding interest such as to lead inexorably and inevitably to alteration, without any consideration of the hurdles in the statutory land registration scheme (such as exceptional circumstances), then that makes a nonsense of the suggestion that it is an overriding interest at all.  In any event, however, it might remain arguable that, if the Court nevertheless has to exercise a discretion, the principle in Re Chowood’s Registered Land [1933] Ch 574 does not apply to such a “right to rectify” and an indemnity would, in principle, be available.

Mrs Dhillon sought, but was refused, permission to appeal to the Supreme Court.