Changes to Land Registry practice: new early completion policy from 3 August 2009

Practical Law UK Legal Update 9-386-0832 (Approx. 9 pages)

Changes to Land Registry practice: new early completion policy from 3 August 2009

by PLC Property

Land Registry has modified this policy

Since publishing this Legal update, the Land Registry has announced a modification of the policy. For details see Legal update, Land Registry modifies early completion policy.

Your comments

This update has generated considerable interest. We have put some of the comments together here: Your thoughts: Land Registry early completion policy. You are invited to join the discussions by sending an e-mail to [email protected].

Background

Land Registration Rules 2003

The Land Registry may reject an application which is "substantially defective" on receipt, or cancel it at any time afterwards (rule 16(3), Land Registration Rules 2003) (LRR 2003).

Where two or more applications are made at the same time, by the same applicant, relating to the same registered title, they rank in the order specified by the applicant (rule 55, LRR 2003).

A typical residential sale transaction, for example, will involve the buyer's solicitor applying to the Land Registry to:

Cancel the entries relating to the seller's mortgage.
Complete the transfer by registration.
Complete the buyer's mortgage by registration.

The buyer's solicitor will normally list the "Applications in priority order" in panel 4 of Form AP1 as "Discharge, Transfer, Charge".

For information on the registration requirements for the creation and discharge of mortgages, together with the priority rules, see boxes:

Land Registry requirements: new mortgages.
Who has priority?
Discharge of mortgages.

Evidence of identity

The Land Registry introduced a new regime relating to identity checks on 10 November 2008. Identity evidence is required on the registration or discharge of a charge.

For more information, see:

Practice note, Confirmation of identity: Land Registry requirements.
LR Practice Guide 67 - Evidence of identity - conveyancers.

Time for dealing with requisitions

The standard period of time allowed by the Land Registry for a response to a requisition is 20 business days (paragraph 3, LR Practice Guide 50 - Requisition and cancellation procedures).

Summary

Early completion

The Land Registry will apply a new "early completion" policy to all applications received on or after 3 August 2009.

The policy will apply where a discharge of whole application is submitted with any other application(s), but without evidence of satisfaction of the charge (evidence of discharge). The early completion policy will apply to both paper and electronic discharges.

Where the early completion policy applies, the Land Registry will reject the discharge application but will, where possible, complete the other applications. The entries relating to the existing charge will stay on the register until evidence of discharge is received.

For the time being, early completion will not apply:

To applications to register transfers of part. However, the Land Registry will keep this under review.
Where an application for discharge is the sole application. The Land Registry will reject this as being "substantially defective" if no evidence of discharge is provided.

How "early completion" differs from current policy

The following illustrates how the "early completion" policy will work and how it will differ from the current policy. There are particular consequences where the property is affected by a restriction in favour of the mortgagee (see note, Restriction in proprietorship register.

To illustrate how "early completion" will differ from the current policy, assume the following:

The seller's solicitor has given the usual mortgage undertakings (see box, Discharge of mortgages).
The redemption money is paid to the seller's lender but the seller's lender delays in providing the DS1.
The priority period of the buyer's official search is running out.
The buyer's solicitor applies to the Land Registry, without evidence of discharge, to register the discharge, transfer and charge.

At present, the Land Registry:

Would treat the three applications (discharge, transfer, charge) collectively.
Would requisition the buyer's solicitor for evidence of discharge and might allow extra time for the evidence to be obtained.
Might attempt to chase the seller's lender directly.
Might cancel the application for being "substantially defective", meaning the interests of the buyer and buyer's lender may lose priority.

From 3 August 2009, under the early completion policy, the Land Registry will:

Reject the application to cancel the entries relating to the seller's mortgage.
Where possible, complete the registration of the transfer and buyer's mortgage. The buyer will be registered as proprietor and, until evidence of discharge is provided, the buyer's mortgage will rank in priority behind the seller's mortgage on the register.
Not "stand over" the application, which means that the Land Registry will not:
- allow extra time for the provision of evidence of discharge (that is more than the usual 20 business days)*; or
- contact lenders directly, to chase for evidence of discharge. The Land Registry has no power to force lenders to supply a DS1 in a certain time frame and, in practice, many lenders refuse to discuss the missing evidence with the Land Registry.
*Please note that the Land Registry has decided to modify the early completion policy (see note, Land Registry has modified this policy).

LR Practice Bulletin 16: Early Completion contains useful flowcharts explaining when the Land Registry will apply the early completion policy and when it will reject some or all of the applications.

Restriction in proprietorship register

There may be a restriction registered in favour of the existing mortgagee, which provides that either no disposition or that no charge of the registered estate may be registered without the consent of the mortgagee.

In this situation, the Land Registry will send a requisition for evidence that either the terms of the restriction have been complied with or that the mortgage providing for the restriction has been discharged.

If the evidence is not supplied within the deadline for responding to the requisition (usually 20 business days)*, the Land Registry will:

Reject the application to register both the transfer and the buyer's mortgage, where the restriction is a restriction against any disposal. .
Reject the application to register the buyer's mortgage, where the restriction is a restriction against charging only. In this case, the register will show the buyer as registered proprietor with a charge in favour of the seller's lender.

*Please note that the Land Registry has decided to modify the early completion policy (see note, Land Registry has modified this policy).

See Comment.

Identification evidence and fees

The Land Registry "completion of registration" letter will confirm which applications:

Have been processed under early completion.
Could not be dealt with.

If the original discharge application could not be dealt with, a separate follow-up application will be required once the evidence of discharge has been obtained. If the Land Registry retained the identity evidence and the evidence is not more than three months old, further evidence is not required for the follow-up application. Panel 13 of Form AP1 should refer the Land Registry to the identity evidence already provided.

If the follow-up application is solely for the removal of the charge entries, no further fee is payable. If the follow-up application includes the registration of a new charge rejected under early completion, no further fee is payable provided the "completion of registration" letter is returned to the Land Registry.

Advantages of early completion

The Land Registry believes that:

Early completion will ensure dispositions are reflected in the register as soon as possible. This will remove the risk that the buyer and the buyer's lender will lose priority due to the seller's lender's delay.
Early completion will reduce the number of requisitions raised and allow the Land Registry to provide a quicker service at a lower cost.
The obligations on the seller's lender to provide a DS1 and on the seller's solicitor to comply with its undertaking are unchanged by the early completion policy.
The temporary retention of an existing charge in the register will not facilitate fraud. The opposite may be true, as:
- once registered, the buyer and buyer's lender will receive notice from the Land Registry of potentially fraudulent transactions; and
- a seller left as registered proprietor could fraudulently charge the title as security for a further loan.

Comment

The main benefit of the early completion policy is that the buyer and buyer's lender should no longer lose priority due to the seller's lender delay in providing of evidence of discharge.

Early completion should also result in administrative savings for the Land Registry, as applications will be processed more quickly, with fewer requisitions raised.

Opposing the new policy, the Law Society (LS) noted that the Land Registry may be the only party to benefit from early completion. The LS argued that early completion will perpetuate and entrench existing poor practice, as it does nothing to encourage lenders to adhere to redemption statements or produce evidence of discharge promptly. A better solution would be for all lenders to provide evidence of discharge within five working days of receipt of the redemption money. Until lenders commit to this system, the Land Registry should allow applicants a substantially extended period of time to provide the evidence of discharge.

Early completion also removes the motivation for the buyer's solicitor to ensure that the seller's charge is removed. If the buyer and buyer's lender can be registered under early completion, there is a danger the removal of the seller's charge may be overlooked for a long time. This might alarm a buyer who sees the seller's mortgage still registered against the property and cause delays on the buyer's future sale. Therefore, even if the buyer’s solicitors use the early completion policy to make sure they do not lose priority, they should continue to press for evidence of discharge rather than leave problems for a later stage.

There is also an important issue to be aware of where there is a restriction in favour of a mortgagee. As explained above (see note, Restriction in proprietorship register), where there is a restriction, either the terms of the restriction will have to be complied with, or evidence of the discharge of the mortgage will need to be provided, before the application can be processed. If the outgoing lender fails either to provide the DS1 within the requisition period (20 business days), or to give its consent to the disposition, the entire application will be cancelled. The buyer will have to re-apply, but will have lost its priority in the meantime.

To be absolutely "safe", a buyer should refuse to complete unless it has a DS1 on completion, but in practice, this is impossible, particularly in relation to residential conveyancing.

It is not clear at present how this issue will be dealt with. One solution might be for lawyers to advise their clients (buyers and lenders) that they can no longer guarantee that the buyer will get a good title at the Land Registry if the delay in producing the DS1 from the seller's lender allows a third party to note an interest on the title in priority to the registration of the transfer. In reality, however, clients are not going to be happy with this and further work needs to be done to find an acceptable solution by the beginning of August.

Source

Land Registry requirements: new mortgages

Noting in charges register

A mortgage over registered land must be registered at the Land Registry to take effect as a legal charge. When registered, the lender is entered as proprietor of the charge in the charges register of the borrower's title (section 51 and paragraph 8, Schedule 2, Land Registration Act 2002) (LRA 2002).

For more information, see:

Restriction in proprietorship register

Mortgages commonly include a restriction to prevent the borrower dealing with the property without the lender's consent (restriction against disposal). Alternatively, the restriction may allow disposals, but prevent the borrower creating further charges (restriction against charging). In either case, the restriction must be registered against the borrower's title. This is in addition to the entry in the charges register (see note, New mortgage: noting in charges register).

Restrictions must be in one of the standard forms provided for by the LRA 2002, unless the legal mortgage is in Form CH1 or in an approved form.

For more information, see Practice note, Protection of third party rights under the Land Registration Act 2002.

Who has priority?

Priority between successive lenders

A first legal mortgage is the best security that a lender can take over a property.

There are complex rules governing the priority of successive mortgages (essentially the order in which the proceeds of sale on default by the borrower are applied). For registered land, the starting point is that legal mortgages rank in priority in the order shown in the charges register, not in the order of the date they were created.

For more information, see Practice note, Priority of security over freehold and leasehold property.

Priority between registrable dispositions

Transfers and legal charges are registrable dispositions under the LRA 2002 (section 27(2)(a) and (f), LRA 2002).

An official search can be made to obtain priority for a registrable disposition (rules 131 and 147(1), LRR 2003). The registrable disposition must then be registered within the 30 business day priority period.

Although a second priority search can be made, this will not extend the first priority period. The buyer or lender will take free of any application lodged during that second priority period but subject to any application lodged during the first priority period.

For more information, see:

Practice note, The day list, priority searches and outline applications.
LR Practice Guide 12 - Official searches and outline applications.

Discharge of mortgages

Use of undertakings

Where the seller's mortgage is to be discharged out of the proceeds of sale, the form of discharge will not be available at completion. The buyer's solicitors will rely on an undertaking from the seller's solicitors to discharge the mortgage and to forward the form of discharge after completion. For Law Society guidance on this issue, see Practice note, Undertakings to discharge a mortgage — Law Society guidance.

Removal of register entries

Once the mortgage money has been repaid, the charge will be discharged. For details of the rights to redeem, see Practice note, Redemption of mortgages, clogs, collateral advantages and consolidation.

For registered land, a registered charge of the whole of the land in a title must be discharged using Form DS1 (under cover of either Form DS2 or Form AP1) (rule 114, LRR 2003).

In certain circumstances, the Land Registry may accept a discharge delivered in electronic form as either an electronic notice of discharge (END), electronic discharge (ED) or e-DS1.

If the lender submits only an END, either Form AP1, Form DS2 or Form DS2E is required.

if the lender submits either an ED or an e-DS1, a separate paper application is not required. EDs and e-DS1s operate as stand-alone applications for discharge.

For more information, see:

Practice note, Mortgages and charges over land: Discharge of a mortgage.
LR Practice Guide 31 - Discharges of charges (Land Registry will publish an updated version before 3 August 2009).

Changes to Land Registry practice: new early completion policy from 3 August 2009 | Practical Law