Posts Tagged ‘overriding interests’

Whether a right to set aside a transaction bound third party mortgagee (England)

June 29, 2016

In Mortgage Express v Lambert ([2016] EWCA Civ 555, CA (Eng)) L agreed to sell her property to S and C. She had a right to set this transaction set aside on the grounds that it was an unconscionable bargain. S and C relied on bridging finance to complete the purchase but quickly re-mortgaged to Mortgage Express. The question was whether the charge in favour of Mortgage Express was subject to L’s right to have the sale to S and C set aside. The English Court of Appeal (Lewison LJ giving the only full judgment) looked at the question within the framework of the Land Registration Act 2002 and the Law of Property Act 1925. The right to have a transaction set aside is a mere equity ([16]). Section 116 of the Land Registration Act 2002 (‘LRA’) confirms that such rights are capable of binding third parties. While Mortgage Express’ charge was, in principle, not subject to unregistered interests (section 29 of the LRA), there was an exception for overriding interests and a mere equity could be such an interest (LRA, Schedule 3, para. 2). L’s claim failed principally because section 26 of the LRA defeats rights which would call into question the validity of a disponee’s title. Allowing the mere equity to be asserted against Mortgage Express would have this effect.  In addition, section 2 of the Law of Property Act 1925 provides that a conveyance by trustees to a purchaser of a legal estate overreaches any equitable interests. The mere equity was overreached by virtue of this provision.

Michael Lower

The Brocklesbury principle: postponing an owner’s rights to those of a later lender or purchaser

August 12, 2015

In Credit and Mercantile plc v Kaymuu Ltd ([2015] EWCA Civ 655) S, W and E were three businessmen who acted as a consortium to carry out property development ventures. There was no formal written agreement between them and they operated on the basis of trust. They agreed to distribute between themselves the proceeds of sale of shares in a company used as the vehicle for one of their ventures. It was agreed that W’s share would be used to finance the purchase of a house (Dalhanna) for occupation by W as his family home. W left all the arrangements for the purchase to S. The property was acquired and W went into occupation. Unknown to W, S had arranged for the property to be acquired by Kaymuu Ltd, a company wholly controlled by S. There was a short interval in the time between the transfer of title to Kaymuu and its registration at the Land Registry. In that interval, S arranged for Kaymuu to grant a charge to C & M in return for a loan of GBP500,000 which S took for himself. S went into bankruptcy and C & M sought possession of the property.

At first instance, W was found to have a beneficial interest under a Pallant v Morgan equity. W argued that his occupation, discoverable on a reasonably careful inspection of the land at the time of the disposition, meant that his interest was an overriding interest and that C & M was subject to it (Land Registration Act 2002, s. 29). This failed; W was prevented from having a right enforceable against C & M by virtue of the Brocklesbury principle (see Brocklesbury v Temperance Permanent BS [1895] AC 173). Sales LJ explained the principle thus:

‘The Brocklesby principle is not based on actual authority given to the agent, but rather on a combination of factors: actual authority given by the owner of an asset to a person authorised to deal with it in some way on his behalf; where the owner has furnished the agent with the means of holding himself out to a purchaser or lender as the owner of the asset or as having the full authority of the owner to deal with it; together with an omission by the owner to bring to the attention of a person dealing with the agent any limitation that exists as to the extent of the actual authority of the agent. This combination of factors creates a situation in which it is fair, as between the owner of the asset and the innocent purchaser or lender, that the owner should bear the risk of fraud on the part of the agent whom he has set in motion and provided (albeit unwittingly) with the means of perpetrating the fraud. The same principle applies where the dishonest vendor or mortgagor of the asset, who by the sale or mortgage raises money from an innocent third party, has been vested with the legal title as a trustee’ ([52])

The principle, which was the basis for the ruling in Abbey National Building Society v Cann, applied in the present case. W had given S authority to act on his behalf in relation to the purchase; S was given the freedom to make whatever arrangements he saw fit to effect the purchase and W exercised no supervision over S’s arrangements. W gave S the means to hold himself out to C & M as the true owner ([57]). As a result, ‘[W] was precluded by operation of the Brocklesbury principle from maintaining that he had a beneficial interest in relation to Dalhanna with potential to have priority over the security interest of C & M’ ([58]).

Michael Lower