Critically Analyse the Rationale of 'Overreaching'

This question asks for an explanation and analysis of the principle of overreaching and for a discussion of how overreaching seeks to balance the interests of a third party purchaser of land and a beneficiary who holds an equitable interest in the land under a trust. The statutes which are applicable here are sections 2 (1) (ii) and 27 of the Law of Property Act (LPA) 1925, as amended by Schedule 3 para 4 (1) of the Trusts of Land and Appointment of Trustees Act (TOLATA) 1996. Section 2 (1) states “a conveyance to a purchaser of a legal estate in land shall overreach any equitable interest or power affecting that estate, whether or not he has notice thereof, and (ii) the conveyance is made by (trustees of land) and the equitable interest or power is at the date of the conveyance capable of being overreached by such trustees under the provisions of subsection (2) of this section or independently of that subsection, and (the requirements of section 27 of this Act respecting the payment of capital money arising on such a conveyance) are complied with”.

It is important to understand “overreaching” in the context of the Land Registration system. Under section 4 (2) of the Land Registration Act (LRA) 2002 the legal titles capable of substantive registration are fee simple absolute in possession (freeholds), and leases which at the date of creation of transfer or creation have more than 7 years to run. The registration system is based on three principles. The first is the mirror principle, that the register should provide a mirror of the title showing up all the rights and interests affecting the land. [1] Overriding interests however are a flaw in the mirror principle. An overriding interest is one which is binding on a purchaser who may not know about its existence because there is not a requirement to register it. The second principle is the curtain principle; this describes the overreaching mechanism introduced by section 2 of the LPA 1925. The mechanism ensures that a purchaser of land who satisfies the conditions of overreaching will not be bound by the interests of beneficiaries under a trust. The interests of the beneficiaries are kept ‘behind the curtain’. To overreach the interests of beneficiaries under trusts, the purchaser must pay the purchase money to at least two trustees. [2] Where overreaching has occurred, the interests of the beneficiaries are not lost but attach to the sale proceeds received by the trustees instead of to the land. The equitable interests are converted from interests in land to interests in money. This enables land to be sold free of the rights of the beneficiary. However if there is only one trustee then the trust cannot be overreached and the purchaser must deal with the beneficiaries, thereby the curtain principle cannot apply. Where a purchaser has not overreached the interest of a beneficiary under a trust because there is a sole trustee, the buyer will be bound by the trust interest unless he is a bona fide purchaser for value without notice of the equitable interest. The notice may be actual, constructive, or imputed. The same situation applies to unregistered title (Caunce v Caunce [1969]1 WLR 286). [3] Under the third principle of insurance, the state guarantees the accuracy of the Register, and compensation is payable to a person who suffers a loss for errors made by the Land Registry.

Having understood how overreaching fits within the land registration system, it is necessary to consider its advantages and disadvantages in greater detail. This has been considered in some depth in academic argument. From an understanding of the overreaching procedure, it is possible to see how it may considered to be unfair to beneficiaries who are having their rights to land converted to rights to money without any control. Two very important cases concerning overreaching are the cases of Williams & Glyns Bank v Boland [1981] AC487 and City of London Building Society v Flegg {1988]AC 54. McKenzie and Philips take the view that the decision in the case of Flegg is particularly harsh on the beneficiaries as their interests were overreached, even thought they had been in actual occupation of the mortgaged property. [4] The overreaching provisions operated to overreach an overriding interest in both the cases of Flegg and Birmingham Midshires Mortgage Servies Ltd v Sabherwal 200 80 P&CR 256 which can again be considered particularly harsh on the beneficiaries.

In a similar vein, Dixon and Griffiths point out that to because of the problems created for beneficiaries by overreaching, the Law Commission in Report No 188 considered three different proposals, the most favourable to the beneficiary being that no beneficiary of full age and in occupation could be overreached without their consent. [5] The other alternatives were that registration by the equitable owner meant that they could not be overreached and that one of the trustees should be a solicitor or licensed conveyancer. They point out that under TOLATA this proposal was given partial effect by a consent requirement being imposed either in the conveyance establishing the trust or by order of the court under S14 of TOLATA. However the protection is limited relying on the consent order as the requirement is not imposed by the Act as a matter of course.

Harpum discusses the case of Flegg in regard to whether an interest in property arose via proprietary estoppel it could be overreached. [6] He points out that in cases such as Sabherwal, where a property is mortgaged other than to finance its purchase, the consents of those who may have beneficial interests in the property are in practice normally obtained and that tighter procedures now prevail with regard to this. He concludes that if those procedures are an insufficient safeguard, it is open to the courts to reformulate them.

It appears from considering the principles of overreaching and the consensus of opinion amongst academics, that the law is more favourable to the purchaser than the beneficiary. The law protects the interests of the third party purchaser provided that they have paid the purchase money to two or more trustees. The purchaser who has not done is vulnerable, but in this situation overreaching would not occur. These concerns were sufficient for Law Commission proposals to be made to make the position fair especially to a beneficiary in occupation. However the safeguard introduced by TOLATA is not a particularly strong one for beneficiaries as it is not built into the legislation. So on balance although the law has tried to balance the interests of both sides, the position of the third party purchaser would appear to be stronger.