Transfer of land - why it may not be safe for a buyer to ignore unregistered third party rights over land

30 October 2014

A buyer who was aware of unregistered third party rights in equipment on land it was purchasing was liable to the third party under the tort of procuring a breach of contract.

Key points

  • A property was transferred in circumstances in which there were unregistered third party contractual rights to remove equipment from the property
  • The equipment was annexed to the land (rather than being a chattel) and so passed with a transfer of the land
  • The purchaser was aware of the third party rights and that the property transfer would lead to a breach of the contract between the seller and the third party
  • Tort of procuring a breach of contract had been committed by the parties to the transfer
  • Knowing or reckless indifference to the possibility of a breach may be enough to commit the tort

Background

Lictor Anstalt v (1) Mir Steel UK Limited (2) Libala Limited concerned the erection of a hot steel mill on registered land. The supplier of equipment and the owner of the land had entered into a personal agreement (the Agreement) governing the ownership of the mill and the supplier's right to enter and remove the mill upon notice.

Following the landowner's insolvency, the land was transferred by its administrators to a third party company (the buyer).

Chattel or annexation?

The supplier claimed that the mill was a chattel, or collection of chattels, to which it retained title and which did not therefore pass with the transfer of the land.

The court rejected this contention and held that the mill had been annexed to and formed part of the land. Various factors pointed to this conclusion, in particular that a structure of this kind had an expected life of up to fifty years and that any removal would be a lengthy and expensive process.

The fact that the parties to the Agreement had sought to classify the mill as a chattel and included a contractual right of re-entry could not alter the position - as a matter of law, regard was to be had to the purpose which the object was actually serving, not the intention of the person putting it there.

Procuring contract breach

In the alternative, the supplier claimed that the parties to the transfer of the land had committed a tort against the supplier by procuring a breach of the Agreement, resulting in the seller no longer being able to comply with its contractual obligations.

Reviewing the case law on this issue and applying the relevant principles in the circumstances, the court held that:

  • Unknowing, unintentional or even negligent interference with a contract is not actionable
  • For the tort of procuring a breach of contract, 'causative participation' alone is insufficient; there must also be
    • knowledge of the contract; and
    • an intention to persuade the contracting party to breach the contract (turning a blind eye to the consequences may be treated as intention)
  • Intention actually to cause loss is not a necessary ingredient of the tort
  • In order for a party to escape liability for the tort by relying upon an honest doubt as to the legal position (in this case, as to the annexation of the mill to the land), a party must show that he was advised and honestly believed that he was legally entitled to take the course of action that he did. That was not the case here
  • The defence of justification - by reason of having an equal or superior right - was not open to the buyer; in addition to its contractual rights, the supplier had an equitable proprietary right in relation to the land superior to the competing rights

In the light of the above and on the facts of the case, the court held that the administrators and the buyer were aware of the content of the Agreement and knew that the transfer of the land would breach the Agreement. The parties to the transfer had therefore committed the tort of procuring a breach of contract.

Although, given that finding, it was not necessary for the court to rule further, it also indicated that had the parties not actually known that the transfer would breach the Agreement, it would have held that they were knowingly or recklessly indifferent to the possibility of a breach, which would have been sufficient for commission of the tort.

Land registration and third party rights

Generally, the doctrine of notice does not come into play in relation to the transfer of registered land and - subject only to the property being subject to something falling within the relatively narrow classes of overriding interests - a purchaser can acquire land confident that he will be taking the land subject only to matters set out on the registers of title. In the present case, the personal contractual nature of the Agreement meant that it was not registered against the title.

Having registered the transfer, s.29(1) LRA 2002 gave the buyer priority over "any [unregistered] interest affecting the estate". However, the court's view was that s.29(1) covers (only) rights affecting the title itself and did not extend to "personal claims against a purchaser based upon an economic tort". Nor was such a conclusion contrary to the public policy behind the land registration system. The court rejected the argument that to impose personal liability on the purchaser of registered land in relation to unregistered adverse contractual rights would offend against the entire scheme of land registration.

While acknowledging that a person acquiring land with actual notice of an unregistered property right does not, without more, commit a tort, the position would be different where the purchaser intentionally procures a breach of that right. However, this should not impose a further burden on an innocent purchaser to have to raise additional enquiries, since such liability would not arise where the purchaser was unaware that the acquisition of the land would breach third party contractual rights.

Conclusion: purchaser beware

Although only a High Court decision, the court's comments in this case are significant. They suggest that there will be instances in which difficult questions may arise as to the extent and nature of a purchaser's 'knowledge' in any particular circumstances and as to the point at which a purchaser becomes fixed with sufficient knowledge for intentional causative participation in the breach of contract.

There is a real risk that a purchaser who is aware of the existence of such third party rights, even in only general terms, may not necessarily be safe in proceeding on the assumption that land will be acquired free from such interests. Turning a blind eye to the possibility of breach arising may leave the purchaser open to a challenge from the beneficiary of those contractual rights.

Although this case concerned third party rights in respect of equipment on the land being sold, the case could potentially have wider implications in other circumstances, e.g. where there are contractual overage arrangements which may be undermined as a result of the transfer of the land.

The present case was a trial on the issue of liability only; the question of the remedy(ies) to be granted remains to be settled subsequently.


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