Head 8: Competition of Title

Question 1

What is the rule of first completion? Which case was this principle established?

Answer 1

In general, competitions of title are regulated by a rule of first completion: the person who is first to obtain a real right prevails over all competitors. Prior tempore potior jure (first in time first in right). This applies to property of all types: in cases involving land, this is often referred to as a ‘race to the register’ (because it is by registration that a real right is acquired).

In Scots law the competition between the trustee and uninfeft purchaser or creditor with an unrecorded heritable security is a struggle with the aim of destroying the other competitor’s chance to obtain the real right by recording the relevant deed and infefting himself first.

So if Alan transfers the same property to both Betty and Colin, ownership is awarded to the winner of the race. The same rule applies in respect of subordinate real rights, eg where Alan grants a standard security to Betty and a disposition to Colin.

The leading statement of this principle (known as “first in time, first in right”) is in the case of Burnett’s Tr v Grainger 2004 SC (HL) 19 per Lord Rodger of Earlsferry at para 141.)

Question 2

Alan has perfectly good title and grants a disposition to Betty. Alan then grants a competing disposition[ Most likely to occur due to fraud of one form or another. However it could be a mistake.] to Colin. Does Betty or Colin become owner?

Answer 2

The answer depends on which of B or C is the first to register the disposition. The first person to register a valid disposition will become owner. If B registered the disposition then C tried to register the disposition then she would not be able to because the disposition would no longer be valid, since it had been granted by A who is no longer the owner.

Question 3

In the rule of first completion, how can acquirers be sure that they are going to acquire valid title?

Answer 3

The practice in Scotland was that the solicitor acting for the seller (Alan) has conventionally guaranteed, personally, that the Register would be fine for the next 14 days - this gives the buyer a 14 day window to register. If in this time someone has registered a competing disposition, and Betty is unable to register then she can sue the seller’s solicitor[ They will be insured.].

Question 4

How are the risks of the property being attached by creditors, or the seller being sequestrated for insolvency mitigated?

Answer 4

Traditionally, such risks to Betty were covered by a personal guarantee – a ‘letter of obligation’ (see appendix of styles) – granted by the seller’s solicitors and covering the blind period during which competing titles are undetectable.

This old practice was unsatisfactory. The 2012 Act introduces a new system of ‘Advance Notices’ in part 4.

Question 5

How do Advanced notices work?

Answer 5

Where a disposition or other deed is to be granted, an advance notice can be put on the Land or Sasine Register (LRA 2012 ss 56 and 57). (In the former it appears only on the application record: s 57(4).) This must be done on the application of the granter, or of someone else (such as the grantee) acting with the granter’s consent. There is no need to wait until conclusion of missives.

Question 6

What is the priority period an advanced notice gives the grantee?

Answer 6

An advance notice gives the grantee a priority period of 35 days (s 58). The details are spelled out in s 59. If a competing deed is registered within the priority period but ahead of the protected deed, the latter is treated as having been registered first.

Question 7

On 1 October an advance notice is registered in respect of a disposition which Alan is to grant to Betty. On 3 October Alan grants a disposition to Colin which is registered on 5 October. On 25 October Alan grants a disposition to Betty which Betty presents for registration on 28 October. Who becomes owner?

Answer 7

Betty becomes owner because she had a priority notice.

NB if both competing purchasers put on priority notices then the priority notices take priority by date.

Question 8

What is an “Offside Goal”?

Answer 8

Sometimes the person who completes title first is later disqualified: the ‘goal’ is ‘offside’. This is a common law rule that provides that in some cases, the losing party in the race to register can invoke the ‘offside goals rule’.

The basis of the rule is probably the delict of fraud on a creditor (ie on Betty). For in transferring the property to Colin, Alan has deliberately made it impossible to perform his prior contract with Betty. Colin’s bad faith makes him an accomplice in Alan’s fraud.

Question 9

How does the Offside Goal operate?

Answer 9

Example 1.
Alan concludes missives with Betty. Alan concludes missives in respect of same land with Colin. Colin registers his disposition first but is in bad faith [This means that Colin knows that there is an earlier rival disposition.], ie knows of the earlier contract.
If Betty’s disposition is protected by an advance notice, and she is able to procure a disposition from Alan and register within the protected period, she will become owner despite having registered second. But otherwise it is Colin and not Betty who becomes owner. Colin’s title, however, is voidable at the instance of Betty.

The offside goals rule gives Betty two potential (alternative) remedies:
⁃ Obtain a reduction of the disposition registered by C.
⁃ She can sue A for breach of contract for damages.

Question 10

What is the leading case on the offside goal rule? What happened in this case?

Answer 10

The leading twentieth century case is Rodger (Builders) Ltd v Fawdry 1950:

‘The appellants [Colin] assumed that their title would be safe once the goal of the Register House was reached. But in this area of the law, as in football, offside goals are disallowed.’

In this case, A concluded missives with B but when it came to the date of settlement, B did not have the money. A then sold to C. C was aware that the previous sale had fallen through. C comes up with the money and registers the disposition. B then finds the money, but A says it is now too late.

The question for the court was whether A was bound under the missives to B or whether B’s failure to pay was a material breach of contract, entitling A to rescind. Held that A could not rescind the contract without giving B a reasonable length of time to pay. Thus, in reselling, A was in breach of a still existing contract with B.

Colin was in ‘bad faith’ in the sense that he knew there had been a failed sale but was content to rely on Alan’s assurances that that failed sale contract with B had been rescinded. Therefore the court held that C’s disposition, although on the register, could be reduced by Betty with the effect of returning ownership to Alan, and then making Betty owner on registration.]

Question 11

When is the grant of a real right voidable under the offside goals rule?

Answer 11

The rule is a narrow one.

The grant of a real right voidable if, and only if

(1) The grant is in breach of the terms, express or implied, of an obligation binding on the granter (Alan). The obligation is usually contained in a contract between the granter and some third party (Alan and Betty), but may also be part of a delivered conveyance, or a trust, or other personal obligation. The paradigm case is breach of warrandice in a contract of sale.
(2) The obligation must pre-date any right to the grant, personal or real, in the grantee (Colin).
(3) The creditor in the obligation (Betty) must either hold an existing real right in the same property or be entitled to obtain such a right. The offside goals rule is about competition of title.
(4) The grantee (Colin) must either know of the personal right at the time of obtaining his real right or be a donee. Constructive knowledge counts.

Question 12

Why do property lawyers not like the offside goals rule?

Answer 12

⁃ C has a real right of ownership because C registers first. B merely has a contractual right under missives with A. It is an elementary principle of property law that someone like C, buying property, is not to be affected by personal rights. Yet in the offside goals rule, if C is in bad faith then B’s personal right trumps B’s real right.
⁃ Therefore, property lawyers have been quite concerned to try to restrict the operation of the offside rule, however the courts[ However the courts have been quite inconsistent.] have taken quite an expansive view of it, in the interests of fairness.

Question 13

How was the offside goals rule conditioned in the case of Gibson v Royal Bank of Scotland plc [2009] ?

Answer 13

In this case it was stated that the rules are not ‘hard and fast’ - rather, the courts have discretion.

Question 14

What are the four requirements for the offside goals rule to be invoked?

Answer 14

(1) [nobody would disagree that this was the law.] The rival grant is in breach of the terms, express or implied, of an obligation binding on the granter. The obligation is usually contained in a contract between the granter and some third party, [Like in the classic Rodger (Builders) case where A disposed to C in breach of a contract with B.], but may also be part of a delivered conveyance, or a trust, or other personal obligation. The paradigm case is breach of warrandice in a contract of sale.
(2) [also uncontroversial.] The obligation must pre-date any right to the grant, personal or real, in the grantee (Colin).
(3) The creditor in the obligation (Betty) must either hold an existing real right in the same property or be entitled to obtain such a right (ie the personal right they held was missives). This is because the offside goals rule is about competition of title.

(4) The grantee (Colin) must either know [If he does know then he is regarded as ‘complicit in the fraud’.] of the personal right at the time of obtaining his real right or be a donee[ If the property was a gift then the offside goals rule applies, regardless of whether in good or bad faith.].
Constructive knowledge counts (e.g. Rodger (Builders) - the second purchaser was told the first contract was off and simply assumed this was true - he didn’t make any independent inquiries. He was held to have constructive knowledge of the other contract).

[(3) This is a little controversial and is based on the case of Wallace v Simmers 1960:

In this case the owner of a piece of land had entered into a contractual arrangement with a relative whereby the relative was allowed to live in a cottage which was part of the property. This was not a lease so there was no real right. The whole property was then sold and when they buyer moved in they found the relative living in the cottage. They told the relative to leave.

The relative litigated and argued that the offside goals rule applied because the buyer knew about the relative so was acting in bad faith.

This argument was REJECTED by the Inner House on the ground that there was no competition of title in this case - no competition for real rights since the relative in the cottage only ever had a contractual right. The court held that the offside goal rule only applies is the personal right which had been breached is a personal right which leads to a real right.
**

KR thinks that this case was CORRECTLY DECIDED. If it had not been decided this was it would mean that if you were buying property you would be bound by any contractual obligations that you were aware of. If this were the law it would subvert the boundary between real and personal rights.

However, this has been challenged in the most recent Outer House case of Gibson v RBS 2009 - the court held that Wallace v Simmers should not be read as a rigid rule - in the end it is a matter of court discretion. Ie that the requirement

(3) of B being entitled to obtain a real right may not be necessary in all circumstances.

KR thinks that Gibson is WRONG and that “we should pretend that Gibson doesn’t say that because KR thinks that it isn’t the law”.]

Question 15

What if all that Betty has is an ‘option [ie the ability to purchase the property at a some point in the future - very common commercially.]’ to purchase the property and then A sells to C - is this an offside goal?

Answer 15

⁃ In the case of Advice Centre for Mortgages Ltd v McNicoll [2006] - the Lord Ordinary held that this is not an offside goal because there is no breach (it isn’t a breach of an option to sell to a third party)
⁃ However in the case of Gibson v Royal Bank of Scotland plc [2009] the Lord Ordinary held that this should trigger the offside goals rule.

Question 16

The offside goals rule applies equally to subordinate real rights. How does this work?

Answer 16

Alan grants a standard security to Betty who registers it. Alan grants a disposition to Colin who registers it.

⁃ In this case there are two live deeds. If Colin wins the race then he becomes owner. Betty is left with a standard security. If Betty tries to register it will be refused because it was not granted by the owner. However if Colin was in bad faith, the offside goals rule can apply since all the criteria above (1)-(4) are met.

Question 17

What happens if Alan grants a disposition to Betty. But before Betty can register, A grants a standard security to Colin who promptly registers it?

Answer 17

⁃ In this case if Betty tried to register her disposition then the Keeper would accept it because it was granted by the owner - the fact that Colin has won the race does not prevent Betty from acquiring a real right. However from a practical point of view, Betty has been severely disadvantages by losing the race (since the mortgage would significantly devalue her property).
⁃ Can the offside goals rule operate here, where there is no actual incompatibility but there is a practical incompatibility. In Trade Development Bank v Crittall Windows Ltd 1983 the court held that the offside goals rule does apply in such a case.

Question 18

Where (i) Alan has transferred to Betty (ii) but Betty has not yet completed the transfer process (eg registered the disposition) and (iii) Alan is then affected by an insolvency process, then (iv) there is a competition of title between Alan’s creditor and Betty. How is this competition resolved?

Answer 18

Such a competition is resolved by the rules mentioned above, ie in most cases by the rule of first completion[ So if Betty gets to the register first then she becomes owner, but if the trustee in sequestration gets there first then the trustee gets the property and Betty doesn’t.

This was definitively decided by Burnett’s Trustees v Grainger.].

Nice guys finish last. Note that the offside goals rule does not apply to a competition with creditors.

Question 19

So far as land is concerned, the practice is to hand over the price against delivery of the disposition. This has the unwelcome result that, until the buyer registers, the seller has both the property and the price. In practice registration takes anything up to three weeks. In what ways was this problem traditionally mitigated in the common law?

Answer 19

1. The tradition practice (as already mentioned) was for the solicitors’ firm acting for the seller to grant a personal letter of obligation (but this was somewhat cumbersome).

However in Sharp v Thomson 1997 it was held – overturning the Court of Session – that the buyer’s personal right prevails against the seller’s receiver. And for a while this decision was thought to have upgraded the purchaser’s personal right to a quasi-real right known as ‘beneficial interest’.

But this highly controversial development was, in effect, reversed by the House of Lords in Burnett’s Tr v Grainger 2004 (which concerned sequestration not receivership). Sharp, however, remains good law as to its actual result (i.e. in relation to floating charges, ONLY)

Question 20

How have the difficulty, which both Sharp and the letter of obligation were designed to solve, been largely removed by?

Answer 20

1. ARTL, for under ARTL both payment and transfer of ownership are electronic, and virtually simultaneous
   [However in practice ARTL is very rarely used because it is too clunky and difficult.];
2. Bankruptcy (Scotland) Act 1985 s 31(1A), (1B) (inserted by the Bankruptcy and Diligence etc (Scotland) Act 2007 s 17), which prevents a trustee in sequestration from registering a title for 28 days;
3. Advance notices [most important by far].

Question 21

What happened in the case of Sharp v Thomson 1997?

Answer 21

[ A brother and sister bought a flat in Aberdeen. Settlement took place. Price was paid. The solicitors failed to register the disposition for 9 months. The seller was a company (A) and was heavily indebted to a bank by a floating charge. [Under the floating charge, if the bank become worried about the solvency of the company they can put in a receiver. The moment the receiver is appointed the floating charge attaches (crystallises) and catches all the property that the company owns at that moment.]

The seller went into receivership. The question was whether, since the disposition had not yet been registered, the flat was caught by the floating charge?

On the relevant date it hadn’t been registered so simply on logic, the flat should have been caught by the floating charge. In addition the floating charge would catch the money. If this result was endorsed then the brother and sister would be left with nothing.

The Outer House and Inner House both ruled that the property and money were caught by the floating charge.

In the House of Lords the decision was reversed on the grounds that the flat could not be caught by the floating charge because the seller no longer had a ‘beneficial interest’ in it. By this they meant that since the seller’s had received the price and the buyer’s had moved in, it might be true as a matter of strict law that the seller’s still owned the property, but the economic reality was that the property was actually the brother and sisters. Accordingly it could not be said that the flat fell within the property of the seller.

This idea of ‘beneficial interest’ is in effect English law - it was an attempt to patch a gap in Scots law which would have led to an unjust result.

The result was very unpopular and it left the law in a highly uncertain state. It seemed to imply that there was a type of right in between personal and real - a ‘quasi-real right’ known as beneficial interest.]

Held – overturning the Court of Session – that the buyer’s personal right prevails against the seller’s receiver. And for a while this decision was thought to have upgraded the purchaser’s personal right to a quasi-real right known as ‘beneficial interest’.
⁃ But this highly controversial development was, in effect, reversed by the House of Lords in Burnett’s Tr v Grainger 2004

Question 22

What happened in the case of Burnett’s Tr v Grainger 2004?

Answer 22

[ The facts of this case are extremely similar to Sharp. In this case the seller went bankrupt (rather than into receivership like in Sharp). The trustee in sequestration of the seller managed to register a disposition before the buyer.

This case was appealed to the House of Lords who applied orthodox Scottish property law - since the race had been won by the trustee in sequestration, the property fell under the sequestrated estate of the seller and thus the buyer did not own it.

The Court did not overrule Sharp but they distinguished it so that Sharp is now ONLY good law in relation to floating charges.]