Introduction to Overriding Interests and Overreaching

Introduction to Overriding Interests and Overreaching

Overriding Interests

Overriding interests are unregistered rights in land that take priority over registered interests, even though they do not appear on the land register. These interests bind a purchaser of land despite the lack of registration, making them a key exception to the mirror principle of land registration. Examples include short legal leases and legal easements.

• Flaw in the Mirror Principle: While the land register is designed to reflect all rights and interests in land, overriding interests can bind a purchaser who may not know of their existence. This is a significant limitation of the mirror principle.

Parliament’s Goals with Land Law Reform

The evolution of land law, particularly with the introduction of the Law of Property Act 1925, aimed to simplify and modernise the system of land ownership and transfer. Parliament sought to:

1. Simplify Land Conveyancing: By reducing the types of estates in land and introducing a system of title registration, the law aimed to streamline the process of transferring land.

2. Ensure Transparency: Title registration creates a public record of land ownership, increasing transparency and security.

3. Protect Vulnerable Interests: Some interests, particularly those that are unregistered, may still need protection to ensure that individuals are not unfairly disadvantaged.

4. Promote Free Alienability: Facilitating the ease of transferring land encourages an active land market, with the land register serving as a reliable resource for potential buyers.

Overreaching

Overreaching is a legal mechanism that allows equitable interests in land to be detached from the property itself and reattached to the purchase money when the land is sold. This process protects the interests of purchasers by ensuring that third-party equitable claims cannot hinder the transfer of the legal estate.

• Function: When overreaching occurs, the equitable interest (e.g., a beneficial interest under a trust) is transformed into a claim against the purchase money, rather than remaining tied to the land. The new owner acquires the land free from those equitable interests.

• Protection for Purchasers: Overreaching ensures that a purchaser can acquire the land without being subject to equitable claims from third parties, thereby promoting the free transferability (alienability) of land.

Conditions for Overreaching

1. Right Must Be Capable of Being Overreached:

◦ Defined under Section 2 of the Law of Property Act 1925, rights that can be overreached typically include equitable co-ownership rights under a trust of land. For example, a beneficial interest in land can be overreached. However, certain rights, such as equitable easements or leases, cannot be overreached.

2. Statutory Conditions for Overreaching:

◦ Legal Estate Conveyance: The transaction must involve the conveyance of a legal estate, such as a sale, lease, or mortgage, and must be completed by substantive registration.

◦ Payment to Two Trustees: Under Section 27 of the Law of Property Act 1925, the purchase money must be paid to at least two trustees for overreaching to occur. This "two trustee rule" is crucial for ensuring that the equitable interests are effectively detached from the land.

Case Studies

1. City of London Building Society v Flegg [1988]:

◦ Facts: The Flegg couple lived with their daughter and son-in-law, who were the registered trustees of the legal estate. After financial difficulties, the property was remortgaged without informing the Fleggs, who had contributed to the purchase price. The issue was whether the Fleggs' beneficial interest could be overridden.

◦ Held: The House of Lords held that the Fleggs' beneficial interest was overreached, and they had to vacate the property. Overreaching took priority over the Fleggs' overriding interest in actual occupation, emphasizing that once overreaching occurs, the equitable interest is extinguished.

◦ Key Principle: As Lord Templeton noted, overriding interests cannot interfere with overreaching because the equitable interest is detached from the property once the legal estate is transferred under the two trustee rule.

2. HSBC v Dyche [2009]:

◦ Facts: After declaring bankruptcy, the parents sold their home to their daughter for a low price, with an agreement that they would continue living there. The daughter mortgaged the property without disclosing the arrangement, and when she defaulted, HSBC sought possession.

◦ Held: The court found that the parents' beneficial interest, combined with their actual occupation, constituted an overriding interest. Since the two trustee rule was not satisfied and the bank had not purchased in good faith, the parents' interest prevailed.

◦ Key Principle: This case demonstrates that when the statutory conditions for overreaching are not met, overriding interests can protect vulnerable parties, preventing the purchaser (or lender) from acquiring the property free of equitable interests.

Conclusion

Overriding interests and overreaching are crucial concepts in land law, balancing the protection of vulnerable parties with the promotion of a transparent and efficient land market. While overriding interests provide essential protection for certain rights that are not registered, overreaching ensures that purchasers can acquire land free from hidden equitable claims, provided the statutory conditions are met. These mechanisms work together to support Parliament’s broader goals of simplifying and modernising land transactions.