Land Registration Act 2002

The Government’s proposals for electronic conveyancing provide for a secure and swift system of transferring title TABLE OF CONTENTS INTRODUCTION Background to the Land Registration Act 20022 Criticisms of Existing Legislation3 The Object of Reform4 IMPLEMENTATION The 2001 Report4 Paper Based Conveyancing Practice5 The Anticipated Model5 Compulsory Use of Electronic Conveyancing6 THE NEW SYSTEM The 2002 Act7 The Scheme of the Act – An Overview7 The New System in Practice9 Comparison with Paper Based Conveyancing10 LAND REGISTRY PRACTICE Detailed Implementation of the System11 Electronic Funds Transfer12 CONCLUSION A Conveyancing Revolution?14 Bibliography15 INTRODUCTION Background to the Land Registration Act 2002 It may be argued that the Land Registration Act 2002 represents the most significant development in conveyancing since the reforms of 1925. Its genesis can be traced to the joint Law Commission and Land Registry consultative document Land Registration for the Twenty First Century[1] published in 1998 which set out a framework for the development of conveyancing over the ensuing decades. Abbey and Richards[2] suggest that this was motivated by three growing pressures: the growth in demand for electronic conveyancing, the fact that current legislation was complicated and unclear and the reality that some 80% of all titles were by then registered.

The extent of this registration undoubtedly paved the way for serious consideration of a shift to an electronic system but it is perhaps the growth in use and acceptance of new technology which was the primary driving factor. This document (para.1.2) readily acknowledges the reality of a situation that was already in process of evolution:

• The whole of England and Wales had been subject to compulsory registration since 1990 with the result that most conveyances of unregistered land now have to be completed by registration; thus the pattern of registration was progressively becoming more comprehensive still;

• The register is now open and can be searched without the consent of the registered proprietor;

• The register is already computerised with most titles entered on the system; and,

• A system of direct access to the computerised register which was introduced in January 1995 enables those who are connected to it to search the register instantly.

A trial had already been commenced with a lending institution of a system of electronic requests for the discharge of mortgages. Thus the Joint Working Group concluded: “The probable outcome of these developments will be a system under which registration becomes an essential element for the creation and transfer of estates, rights and interests in land, performing a similar function to the formal requirements that exist under the present law, and which it would replace. The implications of these changes are considerable and underlie much of the thinking in this report.” Criticisms of Existing Legislation If technological change was pulling the need for reform forward into the next century, it was also being driven from behind by perceived deficiencies in the existing legislation. The land registration system had been in existence for some three quarters of a century; the legislation was regarded as badly drafted and unclear with the primary legislation being supplemented by a plethora of secondary rules making it unclear which elements were to be found where.

It was conceded that the system “has been made to work very effectively, but this has often been in spite of rather than because of its legislative structure”. The Land Registration Act 1925 was conceived as a mechanism for translating the principles applicable to unregistered land into a registered format with the intention that both sets should be fundamentally the same with the register providing a perfect mirror of title.

In reality discrepancies had developed in such areas as the protection of rights of occupiers, the priority of equitable interests and the rights of those claiming adverse possession. It should be observed that whereas the basis of title to unregistered land was the fact of possession, the basis of title to registered land was the fact of registration itself. The perpetuation of this anomaly was considered especially undesirable: “With more than 80 per cent of the estimated number of titles to land in England and Wales now registered, there seems little point in inhibiting the rational development of the principles of property law by reference to a system which is rapidly disappearing, and in relation to which there is diminishing expertise among the legal profession.” The Object of Reform Thus three clear objects were established:

• There was a need to establish a coherent body of law with the principles of land registration clearly articulated in primary legislation. Unlike the existing body of law, secondary legislation should be employed only to provide for the detailed working of those principles;

• There was a need to conduct such reform with due regard for the existing working of the current law without causing undue disruption or expense while allowing the ‘new’ system to be sufficiently flexible to adapt to the requirements of electronic conveyancing;

• Regard should also be had to resource implications – however desirable the move to an electronic system might be, the cost of doing so had to be realistic.

IMPLEMENTATION The 2001 Report The Joint Working Group continued its work building on the foundations of the 1998 consultative document and culminating in the publication in 2001 of Land Registration for the Twenty-First Century – A Conveyancing Revolution[3].

This contained a draft Bill and detailed commentary upon its provisions. Perhaps inevitably given the passage of time and further technological advance, this laid still greater emphasis upon the desirability of a shift to a paperless system (para.2.41): “The move from a paper-based system of conveyancing to one that is entirely electronic is the most important single feature of the Bill.” It should be observed that by this stage the move to an electronic system had already begun to occur through subtle changes in subordinate legislation. It was possible to identify the Registry of the discharge of a registered charge by electronic means, applications to register dealings in registered land could be lodged electronically. There was also the growing influence of the National Land Information Service which gave access on-line to a range of information about property such as local authority registers of land charges. Paper Based Conveyancing Practice In order fully to appreciate the scale of the reforms introduced by the 2002 Act it is necessary briefly to consider the operation of the previous system.

The transfer of land was typically preceded by the exchange of contracts of sale. The Land Registry would not usually become involved at this stage: it was considered more effective for the buyer to protect his position by making a priority search under the Land Registration (Official Searches) Rules 1993 than by the entry of a notice or caution in the register. Transfers of legal estates were then made by deed with this subsequently being submitted to the Land Registry for registration. This system gives rise to a so-called “registration gap”.

Until registration, the transfer would only operate in equity. When a transfer was thus registered, it was deemed to be effective from the point at which the application for registration was deemed to have been delivered to the Registry. Complications arose where the Land Registry raised requisitions following the making of the application and issues such as cross easements and other ancillary rights required to be resolved. This could have the effect of delaying considerably the registration. The Anticipated Model Therefore, it was considered that the involvement of the Registry in the conveyancing process should begin considerably earlier (para.2.50): “In many cases the disposition and, where title is already registered, its simultaneous registration will be the last stage of the conveyancing process.

That means that all the conveyancing work must be completed by that date. One of the intended objectives of the new system is to identify errors and discrepancies at the earliest possible stage, and to resolve any difficulties as far as possible before registration.” At this stage of the consultation process, a number of factors were identified as critical to the success of the new system.

First, the system would need to be secure: thus access should be restricted to appropriately licensed practitioners. Compulsory Use of Electronic Conveyancing Further, it was recognised at an early stage that for an electronic system to succeed, it may be necessary to consider introducing it on a compulsory basis in order to achieve comprehensive coverage. Thus it was proposed (para.2.59) that a disposition should only have effect if it was made by means of an electronic document, communicated in electronic form to the Registry and simultaneously registered: “This is a power that will not be exercised lightly. When solicitors and licensed conveyances enter into network access agreements with the Registry, they will be required to conduct electronic conveyancing in accordance with network transaction rules.

Those transaction rules are likely to provide that the dispositions and contracts to make dispositions are made in the manner explained [above]. In other words, those rules will ensure that dispositions are simultaneously registered, which is the single most important technical object of the Bill.” (Para.2.60) In the event, as will be seen below, while the 2002 Act confers power upon the Lord Chancellor to make use of the electronic system compulsory, this has not yet occurred. In the explanatory notes to the Act[4], it is stated: “The use of this power will become feasible only when electronic conveyancing has become much the most usual way of effecting transactions.” It is submitted that this reluctance is regrettable. It has overtones of the reticence which dogged the 1925 legislation for so many decades thus inhibiting for far longer than its architects envisaged, the achievement of a comprehensive system of registration. THE NEW SYSTEM The 2002 Act The Bill passed through both Houses of Parliament with commendable rapidity receiving Royal Assent on 26 February 2002 and coming into force on 13 October 2003.

It was greeted with political enthusiasm. At the time of the Royal Assent, Michael Wills, Parliamentary Secretary at the Lord Chancellor’s Department exclaimed: “This piece of legislation marks an important step towards the fulfilment of the Government’s commitment to develop a modern basis for land registration to make conveyancing faster and cheaper. Most importantly, it will make possible the development of an electronic conveyancing system, so that land and property transactions can be completed electronically. The Act will bring more information about rights over property onto the register.

This will make the property transaction process more open, improving the efficiency of the property market.” The Scheme of the Act – An Overview At the heart of the new Act lies s.91 which prescribes the formalities required for those documents in electronic form which are to be used for the dispositions specified by the rules. Such documents must make provision for the time and date that they are to take effect and must contain the certified electronic signatures of those by whom they are authenticated. A document which thus satisfies these conditions is to be regarded as being made in writing and signed and as a deed for the purpose of any enactment. The former attestation requirements do not apply in these circumstances and thus such an electronic document will satisfy the requirements of s.2 of the Law of Property (Miscellaneous Provisions) Act 1989 and s.52 of the Law of Property Act 1925 in respect of a written contract and the deed required to give effect to the conveyance of a legal estate. Section 93 follows the compulsion scheme discussed above and provides for dispositions only to have effect when made in the appropriate electronic form and communicated to the Registrar with simultaneous registration.

Subsection 5 provides that “before making rules under this section the Lord Chancellor must consult such persons as he considers appropriate”. Even disregarding the need for this process of consultation, it is therefore likely to be some time before this element of compulsion will come into effect.

In order for this to happen, the electronic systems will have to be fully brought into effect (progress in this regard is considered below). However, the availability of even a non-compulsory system is likely to have a profound effect. Practitioners and clients alike are likely increasingly to favour the streamlined efficiency and security of the new system (especially given the pitfalls of the “registration gap” discussed above and progress towards fully comprehensive registration is likely to be significantly enhanced. An interesting consequence of the way in which the compulsion requirement is framed is that in the event of transactions not being conducted electronically, they will have no effect.

This stands in stark contrast to the present situation in which a paper transfer although it can have no legal effect until registered nonetheless gives rise to an equitable interest. Thus at present when registration is delayed, interests are created which are said to be “off the register”, a situation which in some instances can last for years to the considerable detriment of a potential purchaser. It remains to be seen with what degree of rigour the courts would be prepared to penalise those who have failed to fulfil the electronic conveyancing requirements. A comparison might be made with the introduction of the requirement of writing by the Statute of Frauds 1677 in response to which equity developed the doctrine of part performance. MacKenzie and Phillips[5] opine: “Overall these changes, when fully implemented, will be to the purchaser’s advantage and will mean that he can buy with greater reliance on the register.

Inevitably, though, there will be circumstances in which the terms of s.93(2) will be thought to have a disproportionate effect or in which it will appear unconscionable for one party to rely on the other party’s failure to observe the new requirements…Only time will tell whether the terms of s.93(2) will be strictly enforced by the courts, but some commentators are already expressing concern that they may be circumvented by the use of equitable principles…”. The New System in Practice A significant feature of the new system will be the responsibility of the Land Registry for managing chains of transactions. Where a practitioner is instructed in respect of a conveyance and there is likely to be a chain of transactions, the practitioner will be required to notify a Registry “chain manager” of that fact and keep him informed of completion of the various stages in the conveyancing process. The manager will track such progress by way of completion of a ‘chain matrix’ which includes such stages as: Contract Issued; Searches Requested; Enquiries Raised; Searches In; Enquiries Completed; Contract Approved; Mortgage Offer and Contract Exchanged.

The centralisation of this monitoring process represents a significant improvement upon the previous situation in which the knowledge of the degree of advancement of each of the elements of the chain is divided between a multiplicity of solicitors and estate agents. The contract is in electronic form and signed electronically. Similarly, the draft transfer and mortgage are electronic. Contracts and transfers are to be submitted to the Registrar for approval. This carries the further advantage as anticipated by the Law Commission of allowing the early involvement of the Registry in order that potential pitfalls may be identified and eradicated.

It is to be anticipated that legal practitioners will welcome this reinforcement of their own scrutiny and, it is to be hoped, will result in a reduction of the number and frequency of professional negligence claims arising from mistakes in the conveyancing process. Particulars in the contract and draft transfer will be checked electronically to ensure consistency.

Completion will now take place by means of the concurrent occurrence of the following events:

• Execution of the transfer and any charges in electronic form which are then transmitted to the Registry for storage;

• Registration of the dispositions so that the register conforms with the notional register previously agreed with the Registry;

• The appropriate movement of funds together with payment of any necessary Stamp Duty and Registry fees.

Comparison with Paper Based Conveyancing Thus it will be observed that the electronic procedure is considerably streamlined and more efficient. Traditional methods for the marketing of property will be largely unchanged but, in common with the desire to make greater use of the new media, it is probable that there will be more use of on-line marketing. After the making and acceptance of an offer and the instruction of conveyancers, whereas full control would have previously continued at that stage to reside with practitioners, the Registry becomes involved and, where appropriate, a chain matrix is formed. Searches can now be conducted speedily by the use of electronic resources such as the National Land Information Service.

It is then probable that the cumbersome process of pre-contract enquiries can be speeded by reliance upon e-mail. The next great advantage for the parties is that whereas previously the various practitioners involved would have had to enter into sometimes complex negotiations to achieve an appropriate timetable for exchange and completion involving numerous separate but linked transactions, this is now co-ordinated centrally by the chain manager who has general oversight and can act as a single point of contact. The exchange of contracts would then have taken place by means of a series of telephone conversations between practitioners; this is now dealt with electronically and overseen by the Registry which generates a draft register containing the proposed new title entries in readiness for completion. The need for requisitions of title at this stage is obviated. Similarly, there is no need for the previous final Land Registry Search since title is at this point frozen protecting the contract.

The need for final signatures on the transfers is similarly redundant since this has been dealt with electronically. Completion may then occur in the manner described above: there is no need for the physical passing over of transfers and deeds, the Land Registry completes the process by converting the draft details into formal entries on the register. There would then have followed application for registration with the attendant pitfalls described above but this is no longer necessary since the register and thus the record of title has been instantly updated upon completion and the register is immediately accurate and safely available for inspection. The parties do not have to wait for the issue of a title document and anyone searching the register is able to do so with confidence that it is a current and accurate mirror of title.

There will of course remain (a diminishing) number of instances of first registration. Once again, however, this can now be dealt with electronically without susceptibility to the “registration gap”. The only distinction is that in such instances, the deeds will still have to be delivered to the Registry to enable it to approve the newly registered title. LAND REGISTRY PRACTICE Detailed Implementation of the System An “early yet definitive” statement of the services that are required to bring the e-conveyancing vision to fruition is contained in the Land Registry publication, Defining the service – e-conveyancing[6]. It is envisaged that the e-conveyancing service will comprise three distinct but liked areas of service delivery:

• A central e-conveyancing service created and maintained by the Land Registry with appropriate IT support;

• An electronic funds transfer service;

• A “channel access” service which would allow users to access the facilities required for e-conveyancing.

The first of these elements will require compatibility with existing electronic case management services in use by practitioners.

It will be necessary to provide for the accurate and unique identification of individual transactions. In the case of land which is already registered this will of course be based upon the existing system of title numbering.

Appropriately licensed users will then have to be able to access the various transaction details including importantly the relevant chain matrix. As with so many other aspects of the new system, this gives rise to considerations of security. Users will have to have the ability to generate electronic contracts either by means of their own resources or access to a central facility supplied by the Registry. Once generated, the contract will have to be capable of transmission both between users and the Registry and there will have to be facilities for amendment prior to exchange.

This creates a potential tension because while access to and the ability to amend contracts must be freely available, it should be remembered that such information will not at that stage be in the public domain. The Registry will have to develop a means of validating the data supplied to it as required and it is anticipated that there will be two “front end” validation functions: first, confirmation that the mandatory data required in the various e-documents has been supplied and is correct by reference to the information already held in respect of the particular title; second, that all registration matters that require resolution before or upon completion such as consents to and the withdrawal of restrictions have been identified and appropriately attended to. If the system is to function as envisaged, there will have to be robust systems in place in order that such missing or incorrect data is located and rectified and where there is for some other reason a failure of validation, appropriate action is taken. The system will have to be sufficiently flexible to deal with the vagaries of conveyancing practice. For example, where a party wishes to withdraw from a transaction, this must be capable of instant communication and action.

It is suggested that in addition to the chain matrix discussed above, the Registry will maintain a “completion matrix” in order to tack all stages from exchange to completion. Electronic Funds Transfer For anyone who has witnessed the febrile atmosphere of a busy solicitor’s conveyancing department when completions are taking place, the proposals in respect of electronic funds transfer are to be particularly welcomed. It is true that the vast majority of transfers of funds are currently conducted by telegraphic transfer but this is usually between lenders, solicitors and the ultimate recipients. This means that considerable uncertainty is generated and anxiety suffered when banks are tardy or otherwise delayed in acting upon instructions to transfer funds and many purchasers suffer at best delay in gaining access to the purchased property and at worst completions which have to take place on days later than agreed.

The Land Registry proposes the establishment of a centralised funds transfer service which would be independent of the e-conveyancing service and the functions of the Registry itself while supporting the operation of both. It is suggested that all transactions in a conveyancing chain that are deemed to be mutually dependant must be processed simultaneously with each other and with the exchange of contracts or completion as appropriate. In order for this to be an effective improvement, it will have to be possible to guarantee that all related transactions occur simultaneously. This is perhaps one of the “tallest orders” confronting implementation of the new system. There will have to be absolute certainty in the system of payment/settlement and such transactions will have, of necessity to be irrevocable.

The Defining the Service publication anticipates the challenges that this will pose. There will have to be sufficient capacity for the system to cope with peak times of demand and highly reliable systems back-up in order to avoid the chaos that would surely ensue were there to be a hardware or software failure.

Similarly, there will have to be close liaison with the e-conveyancing service in order to ensure the validity of the transactions and to bring about the benefits which instantaneous updating of the register are deemed to confer. Security considerations will be even more paramount than in the case of access to data relating to conveyancing transactions in view of the anticipated high value of the total funds subject to transfer. It is therefore not surprising that a degree of self-doubt and external scepticism may be introduced to the anticipated functioning of the electronic system. The track record of other government departments such as the Child Support Agency in terms of IT performance and reliability is hardly unblemished! There are some difficult balances to be struck, for example it is said (para.5.1.1.4) that: “…Access must not be irksome or onerous, but equally security must not be compromised.

Security must not be cumbersome and should not reduce usability and scalability.” Similarly, if there is to be confidence in the system there will have to be absolute integrity of data and the ability implicitly to rely upon the same as authentic. Finally, specific concerns have been raised about the reliability of a system which is dependant upon electronic signatures. Such a technique is unavoidable if the aim of simultaneous streamlined transactions is to be achieved but there is inevitably the risk of the potential misuse of such signatures by third parties. The use of such signatures has become commonplace in other spheres of commercial activity – for example the completion of contracts of employment – but it is difficult to envisage any comparable activity in which the implications of misuse are potentially so great. Quite apart from the consequences to an individual’s holding of property in the event of fraud, the potentially vast sums of money which will be transferred as part of the electronic conveyancing process render the price of failure into a different order of magnitude.

One safeguard would be to hold a solicitor or conveyancing practitioner liable in the event of misuse of his electronic signature. This is a logical step but one which then imposes great burdens upon the practitioner in terms of maintaining the security and integrity of his own systems. While welcoming the ease with which conveyancing could be conducted electronically, the downside risk of failure to ensure office and IT security is likely to prove something of a disincentive. CONCLUSION A Conveyancing Revolution? There can be no doubting the good intentions which underlie the reforms contained in the Land Registration Act 2002.

They are a par with the spirit that motivated the classic reforms of 1925 and are directed toward substantially the same end, namely the creation of a system of transfer and interrogation of title that is comprehensive and reliable and so far as can be possibly achieved a situation in which a centralised land register is a perfect mirror of title. However, just as the 1925 Acts have been beset with unforeseen problems and the development of full registration is even after all these decades far from complete, it is possible to identify a gap between the aspirations of the Act and the ability of an e-conveyancing system to function as intended in practice. There are two notable areas of concern. The first lies in the fact that the use of electronic conveyancing will not initially (and possibly not in the foreseeable future) be compulsory. This risks the emergence of a twin track system comparable to that which continues to beset the present register by virtue of the continued existence of unregistered land.

It is to be hoped that this would naturally diminish by degrees but this cannot be guaranteed without further government intervention. The second remains the very practical concerns of the ability of the Land Registry and any independent bodies which may be set up to complement its activities to deliver a service of the quality and reliability that is aspired to.

However, in conclusion it is submitted that this may be an unduly defeatist line of argument. The emergence of new technology demands an improved system for the twenty first century that exploits such advances and it would be churlish to allow concerns over practicality and the inherent conservatism of some practitioners to stand in the way of such progress. Bibliography Abbey, R. & Richards, M., A Practical Approach to Conveyancing, (7th Ed., 2005) Land Registration Act 2002 Land Registration Act 2002 – Explanatory Notes, www.opsi.gov.uk/ACTS/en2002/2002en09.htm Land Registry, Defining the service – e-conveyancing, (Updated 27 February 2004) Law Commission, Land Registration for the Twenty First Century, (Law Com No.254, 1998) Law Commission, Land Registration for the Twenty-First Century – A Conveyancing Revolution, (Law Com No.271, 2001) MacKenzie, J-A & Phillips, M., Textbook on Land Law, (10th Ed., 2004) Smith, R., Property Law, (5th Ed., 2006) www.opsi.gov.uk www.landregistry.gov.uk/e-conveyancing/publications   1

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Footnotes

[1] Law Com No.254, 1998 [2] Abbey, R.

& Richards, M., A Practical Approach to Conveyancing, (7th Ed., 2005), p.24 [3] Law Com No.271, 2001 [4] www.opsi.gov.uk/ACTS/en2002/2002en09.htm [5] MacKenzie, J-A & Phillips, M., Textbook on Land Law, (10th Ed., 2004), p.111 [6] Updated 27 February 2004

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