Property Law – Forged Mortgages, Statutory Magic and Unbroken Statutory Spells!

By : PJ Kirby

PJ Kirby highlights the problems of rectifying the registry when there are forged charges in a contested mortgage.

Unfortunately it is not unusual in a contested mortgage possession action to find that the mortgagor or one of the mortgagor’s is alleging that the charge is invalid in that his or her signature on the charge is a forgery. One’s immediate reaction on being faced with such facts may be to assume that the charge is void and that the lender cannot rely on the same. In the case of registered land such a reaction, whilst understandable, might be premature.

A mortgagor who claims that the charge was forged will seek rectification of the register. However the power to rectify the register under section 82 Land Registration Act 1925 is a discretionary one. If a charge is forged there will normally be two “victims”: the lender and the registered owner of the land (whether joint or sole). Faced with the competing claims of the two victims the court has to decide whether to rectify or not. How should the court exercise the discretion it clearly has?

In the recent case of Commercial Acceptances Ltd v Shaikh (Ch Div. 22.6.01) HHJ Reid QC had to deal with just such a scenario. The claimant had lent Mr Baloch money. The debt was secured by a charge over a long leasehold property owned by Mr Shaikh. Mr Baloch had passed himself off as Mr Shaikh and had forged the charge. Unsurprisingly Mr Baloch did not pay off the debt. The Claimant accepted that the charge was a forgery but sought to rely on the statutory magic of registration : namely that registration of the charge gave the lender a valid charge even if the charge document itself was a forgery. The lender contended that whilst there was power to rectify the register it should not be exercised in favour of Mr Shaikh, who it alleged had been partly the author of his own misfortune.

The judge having reviewed the authorities on the discretion to rectify held that the true test to be applied was to “look to the justice of the case [how novel!] and see whether the party who is seeking rectification has been guilty of conduct of such a nature as to render it unjust that the register should be rectified.” The test was a brad equitable one.

On the facts of that case the judge decided that Mr Shaikh had been reckless in his property dealings in this country and had left matters to people who turned out to be untrustworthy and dishonest. Mr Shaikh’s carelessness had facilitated Mr Baloch in his fraud. The circumstances were such that it would be unjust to order rectification. The judge concluded that “the statutory magic has operated and the statutory spell should not be broken.”

One of the factors considered by the judge when exercising his discretion was the fact that if the register was rectified Commercial Acceptances could apply to the Land Registry for compensation under section 83 Land Registration Act 1925. The judge did not think that this factor weighed heavily in the balance. However Mr Shaikh has been given permission to appeal from the Court of Appeal and it would appear that the judge who gave permission thought that the right to compensation may be a more important factor. The appeal is due to be heard in January 2002.

Those who act for lenders may have experienced difficulties in persuading the Land Registry to make compensation in cases involving forged charges. No indemnity is payable where the lender “has caused or substantially contributed to the loss by fraud or lack of proper care”. Whilst one would hope that one’s own lender client will not have been involved in the fraud it is not so difficult to suggest that the lender or its agents was negligent in the way in which it agreed to make the loan or that the lender’s solicitors failed to take proper care at the time of the charge.

Until Shaikh has been before the Court of Appeal one should be slow to agree to a charge being vacated and the register being rectified just because the charge was forged. To what extent was the owner to blame? If he was then look to that old statutory magic.