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IM On The Money - Issue Two

Unilateral Notices: Exploding The Myths

The effect of a Unilateral Notice is limited and they are not the panacea for protection of all interests in property they are sometimes considered to be. However, compared to their effect they seem to cause unlimited confusion amongst buyers and sellers as well as their advisors.

The advantage of such a Notice is that it is quick and can be entered into without the Registered Proprietor’s consent. Further, at the time of registration, the applicant need not prove the validity of his interest, merely that it is of a type that can be protected by way of Notice.

This brings us neatly to the first common misconception: the entry of a Notice in the register does not guarantee that the interest it protects is valid or even that it exists.

The proprietor can apply for any Notice affecting his title to be cancelled at which point the applicant will be required to prove his entitlement to it. In the event a disagreement arises the matter will be passed to a HM Land Registry Adjudicator to resolve. This can be an extremely long and costly process and can frustrate many sales as buyers will not often wait for a resolution.

Notices will not prevent a sale in the way restrictions can (another common misconception). Essentially, they ensure the beneficiary receives notice of any disposition. However, they are also used to protect priority of interests which either cannot be registered in their own right or pending registration if there are delays.

It is important to note that, if registration of a charge does not occur within the initial 6 week priority period, the proprietor is in severe danger of losing priority to later interest unless a Unilateral Notice is lodged pending registration. A further, and surprisingly common, misconception is that simply renewing the priority search offers adequate protection. This is not the case as the search only protects against entries made during its validity – any intervening interests will take priority at the end of the search priority period even if it is renewed with no break.

We see numerous cases where experienced solicitors have lost priority because they have been unaware of this simple point – this can be costly as the lender now left with a second (or worse) charge will then have a claim in negligence against his conveyancer. In the worst case scenario the deprived lender will argue he would not have proceeded at all had he known he would obtain only a second charge and may hold the conveyancer liable for his entire shortfall on sale. This will usually seriously outweigh the basic claim which is the cost of paying off the charge with priority.

Mortgagees in possession can have particular problems with Notices because they are not entitled to apply for them to be cancelled, only the registered proprietor or a party entitled to be registered as such can apply to cancel.

In our view, this is a serious omission from the Land Registration Act 2002 – the previous Act expressly provided for mortgagees in possession to make applications as if they were the proprietor – the current one does not.

Notices protecting charges will be overreached (i.e. cancelled) automatically on a sale by a mortgagee in possession.

However, the effect of this was illustrated in the recent case of Valais Limited v Clydesdale Bank plc (2011) where the Claimant (the proprietor of a registered charge) sought removal of unilateral notices in favour of the Defendant.

The Notices protected equitable charges in favour of the Defendant and the Claimant, a mortgagee in possession, claimed they would deter potential purchasers.

This suggests a misunderstanding of overreaching by their advisors as it was always clear the charges would be overreached and the Notices cancelled on sale. The Court agreed and refused to order their removal.

To be clear, not all Notices will be cancelled on sale, another area of confusion. The question as to whether the Notice will remain after sale or not depends on whether the interest it protects will be overreached, nothing more.

Hence, a Notice protecting a charge or charging order need not concern a mortgagee in possession. A Notice protecting an Option for Sale entered into by the borrower, for example, causes much more difficulty.

Such notices are surprisingly common and are placed to prevent borrowers taking deposits to sell and then selling elsewhere – anyone purchasing with such a notice on the register will be deemed to have notice of the arrangement.

These notices are not overreached and cause sellers problems as no buyer’s lender will complete without their removal.

Although the borrower’s mortgagee is rarely bound by the option he cannot apply to remove/cancel the Notice (see above).

In such a situation, the lender must obtain the agreement of the beneficiary to remove his Notice or issue a similar application to that in the Valais case to secure its removal.

At first glance, the Valais case may seem to preclude such an application. However, the Court will recognise the distinction between the interests seemingly protected and the status of the Notice after sale. We have successfully made such applications in the past and there is no reason to suggest the Valais case will prevent that in future in appropriate circumstances.

If you need legal advice in relation to a unilateral notice, our property litigation team may be able to help.

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