460 Property Law
The data collection role, however, continues to be important. National property registers provide the best possible repository of information about the social, economic and demographic distribution and movement of property holdings, and it is significant that current plans for electronic conveyancing envisage links between the Land Registry system and government departments such as the Inland Revenue Stamp Office and Valuation Office Agency (paragraph 1.2 of Land Registry, Defining the Service: E-conveyancing (July 2004)).
12.2.8. Disadvantages
12.2.8.1. Hard cases
All these advantages of formalities rules require careful scrutiny because the disadvantages are so unpalatable. The main problem is that strict implementation of formalities rules can lead to unjust outcomes in individual cases. As Lord Nicholls said in Wilson v. First County Trust (No. 2) [2003] UKHL 40 below, ‘The unattractive feature of this approach is that it will sometimes involve punishing the blameless pour encourager les autres.’ Individuals are made to suffer undeservedly, or are allowed to break promises, defeat legitimate expectations or keep undeserved benefits, solely in order to preserve the integrity of the system. The rule in Walsh v. Lonsdale, considered in section 12.3 below, and equitable doctrines of estoppel and resulting and constructive trusts can help to avert the unjust consequences of a failure to comply with formalities in some cases, but, as we see in Lloyds Bank plc v. Carrick [1996] 4 All ER 630 below, there are limits to their effectiveness.
In Wilson v. First County Trust (No. 2), the House of Lords had to consider whether this was compatible with the rights guaranteed by the European Convention on Human Rights. The case concerned section 127 of the Consumer Credit Act 1974, which provides, in effect, that, if a loan agreement covered by the 1974 Act does not contain prescribed information, it will be enforceable only on an order of the court. The section also provides that, in most cases, if the lender fails to comply with the formalities requirements by omitting prescribed information, the court has a broad discretion to make whatever order it considers just, having regard to the prejudice caused by the contravention and the degree of culpability for it. However, section 127(3) provides that, in the case of some specified failures, this does not apply, and the court has no discretion: it must refuse to make an enforcement order. The effect of this is that both the credit agreement and any mortgage or charge securing it will be unenforceable, so the lender will be unable to recover the loan at all. In the Wilson case, Mrs Wilson had borrowed £5,000 from a pawnbroker for six months, pawning her car to secure repayment of the loan. She was charged a ‘document fee’ of £250 which was added on to the loan, so that the total amount of credit was specified in the loan agreement as £5,250. One of the terms that has to be included in any loan agreement covered by the 1974 Act is the total amount of credit, and if the lender fails to comply with this, section 127(3)
Transfer and grant 461
applies and the loan is wholly unenforceable. The House of Lords held that, by making the honest mistake of specifying £5,250 as the total amount of credit, the lenders mis-stated the total amount of credit and therefore the loan was unenforceable, even though the mistake had not in any way misled or disadvantaged Mrs Wilson. She was therefore entitled to keep both the £5,000 and the car. The House of Lords concluded that this Draconian outcome was not an infringement of the lender’s rights guaranteed by Article 6(1) of, and Article 1 of the First Protocol to, the European Convention on Human Rights (guaranteeing rights to a fair hearing and to peaceful enjoyment of possessions), because section 127(3) pursued a legitimate aim of protecting consumer debtors and the statutory bar on enforcement was not disproportionate to this aim.
In other types of transaction, however, the policy aim of formalities rules is not so obviously compelling, although it is doubtful whether the courts would come to any different conclusion, given the longevity and ubiquity of formalities rules in most European legal systems.
12.2.8.2. Costs
The other disadvantage of formalities rules is that they add to the costs of transactions, not so much because they involve direct expenditure but because, as Peter Birks says, they are designed to put people to extra trouble. In high-value transactions this may be easily outweighed by the advantages gained by imposing the formalities, but this will rarely be the case for low-value frequently traded items. This provides some explanation for the lack of formal requirements for the sale of goods.
Extract 12.1 Peter Birks, ‘Five Keys to Land Law’, in S. Bright and J. Dewar (eds.), Land Law: Themes and Perspectives (Oxford: Oxford University Press, 1998), Chapter 18
Formal requirements oblige people to do things in particular ways, usually ways which put them to some slight extra trouble. It might be, for example, that the law would treat a promise as binding only if you made it meekly kneeling upon your knees. In practice, writing and registration are the formalities usually insisted upon. There can be lighter and heavier versions of both.
Land law insists on formality above all at two crucial points in the acquisition of real rights, contract and conveyance. If a landowner decides to make a gift, there will be no contract. Suppose she wants to give her daughter the fee simple in a strip of woodland. She will move straight to the conveyance, for centuries done by deed. The conveyance confers the real right. The sacrosanct formal requirement of a deed is now being made to give way to public registration and, more precisely, to computerized entries on the register. Direct gifts of land, other than by will, are not all that common. Another kind of gratuitous transfer is a conveyance to trustees upon trusts declared by the settlor. The declaration of a trust of land, which accompanies the conveyance, has to be evidenced in writing.
462 Property Law
Generally speaking, a conveyance follows a contract, usually a contract of sale. Contracts to convey interests in land are void unless they are made in writing. The usual sequence is, first, an informal agreement ‘subject to contract’; secondly, the formal contract made in writing, by which the parties for the first time become bound to make, and take, the conveyance; thirdly, the conveyance, which confers the right. In England there is usually a deplorable delay between the first and second stages, though in Scotland the lawyers manage to move from stage one to stage two in two or three days.
This delay means that parties are forced to rely on each other long before there is any legal tie. The unscrupulous can then exploit the fact that there is no sanction for withdrawal during this long first stage. The result is gazumping and gazundering. A gazumper is a seller who suddenly says that he will withdraw unless the buyer pays more. A gazunderer is a buyer who threatens to pull out unless the seller will take less. These practices are unknown in Scotland. They are not a by-product of formality. They are a by-product of the practice of the professionals who run the housing market and in particular of their practice in not executing the formal contract at the point at which all contracts are normally finalized – namely, the moment from which the parties need to be able to rely on one another.
What does formality facilitate? What ends does it serve? Even though it lies outside the land law, it is convenient to answer by reference to the best-known formality of all. Everyone knows that a last will has to be made in writing and signed before witnesses. It is no use just scribbling it on the back of an envelope or whispering it to one’s best friend. There are huge advantages in this formal requirement. It helps the person making the will think hard about the job to be done. Later, it goes a long way towards eliminating doubt and argument at a juncture in human affairs at which strife is all too near the surface. All hell would break out if a deceased’s last will were a matter of proving by general evidence, and in the absence of the only person who could really know, what the last wishes really were. The formal will settles the matter.
It is much the same in land law. There is an extra reason too. It derives from the invisibility of real rights. Just as one cannot see a fee simple, so one cannot see an easement or a restrictive covenant. A neighbour’s right to pass over a field does not reveal itself in a pink line, nor will even an infra-red camera disclose his right to restrict or forbid building. If one is buying a fee simple from a company, and a firm of solicitors is in daily occupation of the premises doing the business of soliciting, one might reasonably infer that the firm holds a lease. But still a lease is not visible, nor a pyramid of subleases. Real rights have to be made apparent through documents. Acquiring land would otherwise be a nightmare unless the law made really massive erosions of the principle of nemo dat. In relation to land, massive erosions of that principle are wholly unacceptable. Some such erosion does indeed have to be tolerated. We have already seen that the price of equity’s recognition of real rights created without formality is just such an erosion, the defence of bona fide purchase for value without notice. Moreover, the protection of the system of registration involves some inevitable sacrifice of unregistered interests.
Transfer and grant 463
There is an inescapable tension. Formality breeds hard cases. What of the person who did not know or was badly advised? She did the job but not in the precise way in which the law required it to be done. In such cases, there is a terrific clash between two simple principles. One is that you cannot have your cake and eat it. You cannot take the advantages of formality and at the same time let off all those who do things in their own informal way.
The other is that pain should not be inflicted except in case of pressing necessity. It is not so easy to send someone away empty-handed who would have taken a fortune if only the right piece of paper had been used. Wherever there are formal requirements, there will be litigation in which these two principles meet head to head.
Whether the rigour of the one will yield ground to the merciful other will depend on several factors, most obviously on the value attached to the formality in question, also on the scale of the exception likely to be created by a concession. If the formality is thought to be really valuable (like the formal requirements of wills), concessions are unlikely to be made, unless perhaps it can be shown that the facts in question will recur infrequently or for some other reason pose no substantial threat to the policy of certainty through formality. One crucially important factor is whether the interests of any third party are involved, in such a way as to be threatened if effect is given to the informal transaction. And has that third party given value? The defence of bona fide purchaser for value without notice, which we have already met, illustrates the respect due to the interests of a stranger who has given value. And, where the sanctity and efficacy of a register are at stake, that stranger is likely to prevail even without proof of good faith.
Suppose that you have dealt informally with me, in circumstances in which a decent argument can be made that, but for failure to satisfy formal requirements, you would have an interest in my house. If it is just a matter between you and me, with no stranger involved, it may be possible for you to make some headway. It will be more difficult if I have already sold my legal fee simple in the house to some stranger. You will have a much harder time against that stranger who has given value. Suppose the law untouched by the requirement of registration. Your informally created equitable interest, even if you succeed in establishing that you acquired one, will be vulnerable to the defence of bona fide purchase without notice. If we add back the requirement of registration, that still fiercer hurdle stands in your way. It is highly unlikely that you will have registered your interest, which in the absence of special circumstances will be void against the buyer from me.
Some interests override the register. They bind even without registration. This represents the attempt of the legislator to anticipate the most obvious instances of the problem endemic in formality. One category of overriding interest is the interest of a person in actual occupation [see Chapter 15 below]. In Hodgson v. Marks [1971] Ch 892 an elderly lady conveyed her house to her lodger in a thoroughly ill-advised attempt to protect him from her nephew. The nephew was hostile to the lodger’s influence. She had no real intent that the lodger should have the substance of ownership of the house. But, so far as the formal requirements of the law were concerned, she had reserved no interest for herself. The lodger sold and conveyed the land to a third party. The old lady found herself in danger of losing her house. It was not so very difficult to find that on these facts she had obtained an equitable interest under a non-express trust. But she had, of course,