House of Lords
|Session 2003 - 04
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Burnett's Trustee (Respondent) v Grainger and another (Appellants)
OF THE LORDS OF APPEAL
FOR JUDGMENT IN THE CAUSE
Burnett's Trustee (Respondent)
Grainger and another (Appellants)
THURSDAY 4 MARCH 2004
The Appellate Committee comprised:
Lord Bingham of Cornhill
Lord Hope of Craighead
Lord Hobhouse of Woodborough
Lord Rodger of Earlsferry
HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
Burnett's Trustee (Respondent) v. Grainger and another (Appellants)
 UKHL 8
LORD BINGHAM OF CORNHILL
1. I have had the privilege of reading in draft the opinions of my noble and learned friends Lord Hope of Craighead and Lord Rodger of Earlsferry. For the reasons which they have given I also would make the order which Lord Rodger proposes.
2. I have studied carefully the opinions of my noble and learned friends Lord Hope of Craighead and Rodger of Earlsferry and they have satisfied me that the interlocutor pronounced by the Extra Division was in accordance with the law of Scotland. The appeal must therefore be refused.
3. I am however by no means satisfied that this state of the law is either desirable or a necessary consequence of fundamental principles of Scots law. In Heritable Reversionary Company Ltd v Millar (1892) 19 R (HL) 43, 52 Lord Macnaughten began his opinion with the words:
4. In the present case, I do feel compelled to uphold the decision of the Extra Division but share the view of its consequences which Lord Macnaughten expressed with such studied understatement. It results in the creditors of Mrs Burnett being unjustly enriched at the expense of the Rev. and Mrs Grainger and I can see no compelling ground of logic or policy which justifies such a result.
5. The unjust enrichment arises from the fact that the mistake of the Graingers in failing to record the disposition in their favour before the permanent trustee means that they are not only unable to assert title to the flat (a consequence which might have been reasonable if the contract had remained uncompleted) but that the permanent trustee is also entitled to keep the money they paid. To say that this is a consequence of their own fault is in my opinion no answer. Mistake is generally regarded as a ground for relief against unjust enrichment, not a reason why the victim should have to suffer the consequences of an error which has caused no prejudice to anyone else.
6. Two reasons of policy and principle are put forward to justify the rule; the strict division in Scots law between real and personal rights and the importance of maintaining the integrity of the register. But both of these principles have in the past been compromised in cases in which justice was thought to require it. The right of recovery of an owner whose property has been obtained by fraud and the right of a beneficiary under a trust are personal rights, but Scots law has had no difficulty in holding that a disponee of heritable estate takes subject to such rights.
7. As for the conclusiveness of the register, it is said that unless the title acquired by the trustee in sequestration defeats the claims of a purchaser who has paid for the property and received an executed disposition, no purchaser from a trustee could know for certain that property in his name was not subject to a prior unrecorded disposition to a purchaser. So be it. But neither can he know whether it was subject to a prior declaration of trust, and for more than a century it has been settled that trust property does not pass to the trustee in sequestration, even if he has recorded a notice of title. No one seems to have found this a great inconvenience. Indeed, Mr Hodge for the respondent accepted that the position would have been altogether different if the disposition to the Graingers had included the words "And pending the recording of this disposition, I hereby declare myself trustee of the subject hereby disponed for the purchasers absolutely." Such a declaration, accompanied by delivery of the disposition to the purchasers, would appear to me to satisfy the requirements of a declaration of trust stated by Lord Reid in Allan's Trs v Lord Advocate 1971 SC (HL) 45, 54. But the existence of the declaration would be equally unknown to any subsequent purchaser from the trustee in sequestration. It is a strange form of conclusiveness that can be so easily defeated.
8. I agree with my noble and learned friends that the decision in Sharp v Thomson 1997 SC (HL) 66 is distinguishable. But, for the reasons I have given, I think it would have been better if it had not been necessary to distinguish it.
LORD HOPE OF CRAIGHEAD
9. I have had the advantage of studying in draft the speech which has been prepared by my noble and learned friend Lord Rodger of Earlsferry. I am in full agreement with it. In view of the importance of the case however, I should like to add a few words of my own to explain why I too would affirm the order of the sheriff granting decree in terms of the second crave of the initial writ.
10. This exceptional and troublesome case presents itself at first sight as a competition between two parties only. On the one hand there are the appellants, to whom in implement of missives of sale a disposition of the subjects was delivered by Mrs Burnett's solicitors in exchange for the payment of the purchase price. On the other there is the respondent, the permanent trustee. He was aware that the subjects had been disponed to the appellants. But he seeks to rely on the fact that when he recorded his notice of title to the subjects, for which he paid nothing, he came first in the race to the register. This simple view of the case tends to suggest that the situation in which the appellants now find themselves is unfair. They paid the price for the subjects to which they obtained entry in exchange for delivery of the disposition on the date of settlement. They are now being told that the subjects are vested in the respondent and that they can no longer acquire a good title to them. In the result they have been deprived of their right to become the owners of the subjects, and they have lost the price which they paid for them. This is not something that could have happened while Mrs Burnett remained solvent. Why then, it is asked, should the respondent be able to deprive them of that right in his capacity as the permanent trustee in Mrs Burnett's bankruptcy?
11. This view of the case however is only one part of a much more complex story. The full details have not been revealed to us. We know little of the background. But we do know that the permanent trustee acts under the statute for each and every one of Mrs Burnett's creditors, not for himself as an individual: Stewart v Jarvie, 1938 SC 309, 316, per Lord Moncrieff. So the contest is more accurately seen as one between the appellants and the general body of Mrs Burnett's creditors. It is on their behalf that the respondent is claiming to be entitled to the subjects which the appellants bought from her. And it seems likely that the creditors, or some of them, were already active in seeking to protect their position before the date of sequestration. They were entitled to do this by means of diligences against her moveable and heritable property, unaffected by any personal obligations that she may have entered into subsequently. One of the effects of a sequestration is to equalise the rights of creditors who have executed diligence: section 37 of the Bankruptcy (Scotland) Act 1985. Another is that it places the permanent trustee, on behalf of all the creditors, in the position of an adjudging creditor with respect to the debtor's heritable property: section 31(1)(b) of the 1985 Act. Accordingly a more complete picture of the contest, and a guide to its resolution in a way that is consistent with Scots property law, may be obtained by examining the range of remedies that are available to creditors in general before the ultimate remedy of sequestration is resorted to and the way in which, in the event of a sequestration, the Act seeks to protect their rights as creditors.
The passing of ownership: the real right
12. At the heart of Scots property law, as Professor Burns points out in the opening sentence of the chapter on infeftment in his Handbook on Conveyancing, 5th ed (1938), p 160, lies the maxim traditionibus, non nudis pactis, transferuntur rerum dominia. The adoption of this rule of the Roman law as part of Scots law can be traced at least as far back as Stair, The Institutions of the Law of Scotland (1693 edition), III ii 5. He accepts that some kind of possession is needed to accomplish real rights, so that thereby they may be "more manifest and sure". Erskine, An Institute of the Law of Scotland (Nicholson's edition), II i 18 too acknowledges the need for "greater certainty" and for the delivery of possession, or at least some public act, "by which it may appear that the former proprietor has given up his right." A statutory exception to what is required to transfer property in corporeal moveables applies in the case of sale. The property in goods passes by force of the contract of sale independent of delivery: Sale of Goods Act 1979, sections 17 and 18. But the rule that delivery is required to transfer ownership has always applied, and continues to apply, to all transactions relating to heritable property. Burns, using language appropriate to the feudal system of land tenure with which he was familiar, explains at p 160 how the principle operates:
13. Section 1 of the Abolition of Feudal Tenure etc (Scotland) Act 2000 is, as its name indicates, will abolish the system of feudal tenure with effect from the appointed day. There is to be introduced instead the new system of ownership of land which is described in section 2. Prior to the appointed day entry with the feudal superior, known as infeftment, will still be required to vest the real right to the purchaser. This is the system which was in force when the appellants entered into their contract to purchase the subjects from Mrs Burnett. The methods by which infeftment is achieved have been amended step by step by the conveyancing statutes. The earlier methods depended on symbolical delivery. Physical occupation of the subjects was not required, nor was physical occupation sufficient to constitute infeftment with the superior. By section 1 of the Infeftment Act 1845 however it was provided that it was no longer to be necessary to proceed to the lands in which sasine was to be given but that sasine could be obtained and infeftment given by recording an instrument of sasine in the General Register of Sasines. The process of registration was simplified by section 15 of the Titles to Land Consolidation (Scotland) Act 1868, which provides that an instrument of sasine is no longer necessary and that it shall be competent and sufficient to record the conveyance or deed itself in the appropriate register. It was further simplified by section 4 of the Conveyancing (Scotland) Act 1924, which provides that a person having a right to property by a title which has not been completed by recording may complete his title by recording a notice of title deducing his title from the person who was last infeft.
14. When section 4 of the 2000 Act comes into force, ownership of land will pass on registration in the Land Register of Scotland where a transfer the land is registrable under the Land Registration (Scotland) Act 1979, or in any other case on the recording of a conveyance of land in the General Register of Sasines. The new system is, in effect, the same as the old after stripping out from it the feudal element. In modern practice, when there is a sale of heritable property, the disposition is the deed by which the subsisting interest in the land is transferred from the old to the new heritable proprietor. Registration in the Land Register of Scotland under the Land Registration (Scotland) Act 1979 has taken the place of the final step, which it was always necessary to take to transfer the real right, of symbolical delivery of the land by sasine and the recording of a notarial instrument or its modern equivalents in the General Register of Sasines. Section 3(1) of the 1979 Act provides that registration shall have the effect of vesting in the person registered as entitled to the registered interest a real right in the land in so far as the right is capable of being vested as a real right. It preserves the rule that delivery of the disposition does not of itself transfer the real right in the property. That rule applies to every transaction by which ownership in land is passed from one person to another. It is not confined to sale, although it is in contracts for the sale of the land that most transactions which lead to the transfer of ownership in land have their origin.
15. It can be seen that none of the changes effected by the conveyancing statutes have departed from the essential principle that up to the moment of the purchaser's infeftment the seller remained infeft with the superior and the holder of the real right in the property. The purchaser completed his title by recording the disposition in the General Register of Sasines: Craigie, Heritable Rights, 3rd edition (1899), p 396. This was the act of infeftment which divested the person who was last infeft of the real right. As Craigie, p 458, explains:
Up to that point the seller remained liable for payment of the feu-duties and the performance of the other obligations of the feu: Menzies, Lectures on Conveyancing (Sturrock's edition, 1900), pp 814-815. Prior to the recording of the disposition in the register the right of the purchaser was a personal right to the lands only. Until section 22 of the 1868 Act was repealed by section 48 of and Schedule 11, Part II to the Conveyancing (Scotland) Act 1970 the right, being personal, was transmissible by assignation: Craigie, pp 458-461. It carried with it all the rights of an uninfeft proprietor. But the right which the purchasers had was not a real right. So it was ineffective as against any third party who was able to obtain infeftment with the superior before he did.
16. In the opinion which he prepared on behalf of the majority of the judges of the whole Court which was reported to this House in Young v Leith (1847) 9 D 932, 937, Lord Fullerton said:
At p 938 he added this comment:
17. The effect of the provisions of the conveyancing statutes is that until the interest of the purchaser has been recorded or registered the seller remains vested in the real right. His relationship with the purchaser is, of course, controlled by the rights and obligations which were created by their contract. When the disposition is delivered the general rule is that it becomes the sole measure of the contracting parties' rights if there is a dispute about the subject to which right has been acquired by the purchaser: Orr v Mitchell (1893) 20 R (HL) 27, 29 per Lord Watson. The seller will usually have performed all the positive obligations arising from the contract of sale when the disposition is delivered to the purchaser on the date of settlement. But that is not an end of their contractual relationship. The seller remains bound not to derogate from his grant of the subjects as described in the dispositive clause. That is a matter of personal obligation, arising from the contract contained in the missives which he entered into with the purchaser.
18. Baron Hume explains the distinction between the personal right and the real right from the point of view of the purchaser in this way in his Lectures (1786-1822), vol II of the Stair Society edition, pp 2-3:
19. The rule that Scots law does not recognise a right which lies between a personal right on the one hand and a real right on the other applies to the relationship between the seller and the purchaser. But it also regulates the seller's relationship with third parties, and in particular his relationship with his creditors. It lies at the very centre of the law relating to rights in security, the law of diligence and the law of bankruptcy.
Protection of the rights of creditors: diligence
20. Rights in security provide means which creditors - "the rest of the world", in Hume's language - may have at their disposal for enforcing payment of their debts, in addition to their rights under the debtor's personal obligations: Gloag and Irvine, Law of Rights in Security (1897), p 3. They may take the form of a right of recourse against someone other than the debtor, as in the case of a cautionary obligation or guarantee. Or they may take the form of a real right in specific property belonging to the debtor, the effect of which is to put his property at the disposal of the creditor for the payment of the debt. No real right of security constituted by an act of the debtor over his heritable property is effectual until it has been completed by registration or recording in the appropriate register. The seller of heritable property is prevented by his contract with the purchaser from granting new security rights over his property which will defeat the rights of the purchaser. But a creditor who holds no right in security granted to him by the debtor voluntarily may subsequently acquire the means of enforcing payment of his debt which is in the nature of a right in security by the use of diligence.
21. The preferences in favour of a creditor which arise from securities constituted by voluntary grant or by legal diligence depend on the principle that the creditor holds a real right in the property over which his security extends: Bell, Commentaries on the Law of Scotland (McLaren's edition), i, 711. In contrast to the grant of a right of security, which is a voluntary act which the debtor performs in favour of the creditor, the use of diligence does not require the co-operation of the debtor. Diligence is the legal procedure by which a creditor attaches the property or person of his debtor, with the object of forcing him to appear in court to answer an action at the creditor's instance, or to find security for implement of the judgment which may be pronounced against him in such an action, or to implement a judgment which has already been pronounced: Graham Stewart, Law of Diligence, p 1.
22. Inhibition and arrestment respectively are prohibitory diligences against heritable and moveable property. Their effect is to make the debtor's property litigious, so as to prevent its voluntary alienation to the prejudice of the raiser of the action or the user of the diligence. The diligence of inhibition against heritable property renders the subject litigious as soon as notice of the diligence has appeared in the Register of Inhibitions and Adjudications kept under section 44 of the Conveyancing (Scotland) Act 1924, known as the Personal Register: Titles to Land Consolidation Act 1868, section 155. Litigiosity is defined by Bell, Commentaries, ii, 144, as "an implied prohibition of alienation to the disappointment of an action, or of diligence, the direct object of which is to attain the possession or acquire the property of a particular subject." The prohibition against voluntary alienations which arises from litigiosity is an incomplete diligence. To complete the diligence the creditor must acquire a title to the subjects affected by the prohibition. This is done by the judicial processes of adjudication, subject to the debtor's right of redemption within ten years, in the case of heritage and of furthcoming in the case of moveables. The adjudication becomes effectual, in the case of heritage, when the decree of adjudication is recorded in the register: section 62 of the 1868 Act, as substituted by section 62 of the Conveyancing (Scotland) Act 1874.
23. The process of adjudication against land for payment and in security of debt seems to have been part of the law of Scotland at least since the beginning of the thirteenth century: Bell, Commentaries, i, 740. A decree of adjudication is a compulsory process, but it has the same effect as a voluntary conveyance of the land by the debtor. The means by which the diligence is made effectual are the same as those which are needed where there is a contract for the sale of the land. Under the previous system of feudal tenure sasine was needed to obtain entry with the superior. Section 62 of the 1868 Act, as substituted by section 62 of the Conveyancing (Scotland) Act 1874, now provides that a decree of adjudication shall be held equivalent to a conveyance of the lands, and that the creditor may complete infeftment by using the decree as a conveyance of the lands or as an assignation of an unrecorded conveyance. It remains competent under the new system of ownership of land to specify a decree of adjudication as a midcouple or link of title for the purpose obtaining a real right to the land in terms of section 5 of the Conveyancing (Scotland) Act 1924, as amended by para 15 of Schedule 12 to Abolition of Feudal Tenure etc (Scotland) Act 2000.
24. Competition between several adjudging creditors is regulated by a rule which was first introduced by the Act of 1661, c 62. This is that every creditor who obtains a decree of adjudication within a year and a day from the date when the first adjudication is entitled to share equally with the first adjudger: Graham Stewart, p 638. Until a process of general sequestration or attachment was introduced by the Sequestration Act 1772, there was no equivalent rule for determining priority between creditors who obtained a diligence against moveables: Bell, Commentaries, ii, 73-74. The rule which was introduced by that Act was that no individual arrestment or poinding against moveables thirty days before sequestration was to have any preference. Provision was made for the conveyance of the bankrupt estate to a factor for its management and recovery on behalf of the whole body of creditors and for its equal and rateable distribution among them. The 1772 Act was limited in its duration, as were a number of later statutes which retained the sequestration system on a temporary basis: Goudy, p 4. It was not until the Bankruptcy (Scotland) Act 1839 was enacted that the system which is to be found in its current form in the Bankruptcy (Scotland) Act 1985 was made permanent.
25. It is against this background that those who seek to purchase heritable property in Scotland must conduct themselves. Parties contract with each other on the basis of what is published to all the world in the register. In practice a good marketable title with clear searches in both the Property Register and the Personal Register is demanded of the seller by the purchaser. In this way the purchaser obtains protection against all transactions which may have affected the property up to the date of settlement. There is, inevitably, a gap in time between the date of presentation of a deed for recording the Personal and Property Registers and the date when it is recorded or registered. A search which produces an adverse entry ex facie of the record, even if it relates to an inhibition which was laid on after the missives were entered into, is not a clear search: Dryburgh v Gordon (1896) 24 R 1. So it is the practice for a letter of obligation to be granted by the agent for the seller to the agent for the purchaser by which the granter of the letter makes himself personally liable to produce a clear search within a specified period after the date of settlement, usually one year, so long as the disposition is presented for recording or registration within a relatively short period. The period specified in the letter of obligation referred to by the appellants in Answer 3 of the Closed Record was twenty-eight days.
26. In practice the letter of obligation provides sufficient protection for the purchaser who presents his disposition for recording or registration with this period. Its purpose is to cover the risk that, during the period between the interim report at the date of settlement and the recording of the disposition, a deed which adversely affects the purchaser's interests may be recorded in the Register of Sasines or a diligence may be registered in the Personal Register. An inhibition laid on after missives have been concluded cannot prevent the due implement of the contract of sale, as an inhibition strikes only at the personal and voluntary acts of the seller. But an inhibition which is laid on after the missives have been concluded but before the date of the disposition, apparently striking at the sale, may cause difficulty in a question with a subsequent purchaser: Henderson v Dawson (1895) 22 R 895, 902, per Lord McLaren.