Posts Tagged ‘priorities’

Priority as between unwritten equitable interest and lender supplying funds to re-mortgage

September 2, 2019

Where A supplies part of the purchase price of property conveyed into B’s name then A is very likely to have an equitable interest under a common intention constructive trust or a presumed resulting trust.

When, however, the balance of the purchase price is supplied by a lender who takes a charge over the property, the charge has priority over the equitable interest. An intention is imputed to A that B’s charge should have priority over A’s interest (Bristol & West Building Society v Henning ([1985] 1 WLR 778 and  Abbey National Building Society v Cann ([1991] 1 AC 56).

In Equity & Law Home Loans Limited v Prestidge ([1992] 1 FCR 353) the English Court of Appeal held that this imputed intention also gave priority to any charge taken out to redeem the original charge  (but with this priority limited to the amount secured by the original charge).

Mrs Brown supplied part of the purchase price of a property conveyed into Mr Prestidge’s name. The Britannia Building Society provided the balance of the purchase price. Mr. Prestidge then re-mortgaged and used a loan from Equity & Law to redeem the Britannia’s charge.

The Court of Appeal decided that Mrs Brown was the sole beneficial owner of the property. The result of the Henning case was that her interest was postponed to that of the Britannia. There was no evidence of actual intentions. Mrs Brown had an imputed intention authorising Mr Prestidge to grant the charge to Britannia.

This imputed intention went further and extended to any charge replacing the Britannia charge (Mustill LJ at 359). This priority was limited to the amount originally secured by the Britannia charge.

Michael Lower

The priority of unwritten equitable interests

April 4, 2017

In Si Tou Choi Kam v Wealth Credit Ltd ([2017] 1 HKLRD 1074) A and B acquired property as legal joint tenants. B’s creditor, C, obtained and registered charging orders over the property. C then applied for an order for sale of the property. A obtained a declaration that A was sole beneficial owner of the property (having supplied the entire purchase price) and registered it at the Land Registry.

The priority of unwritten equitable interests is governed by the doctrine of notice. The charging order is to be treated as if it were an equitable charge. Priority is governed by the first in time rule. A’s interest, having arisen at the time of acquisition, has priority under this rule.

There is no authority for the proposition that A is under a duty to obtain a declaration and register it in order to preserve this priority. It was surprising, therefore, that the court held that A’s priority was governed by the date of registration of the declaration.

Michael Lower



Abbey National v Cann: mind the gap?

October 23, 2016

In Abbey National Building Society v Cann ([1991] 1 AC 56) the House of Lords considered the relative priorities of a charge used to acquire a home and an unwritten equitable interest in it which came into existence simultaneously. A man bought a home for his mother. She undoubtedly had an equitable interest in the home since this was their common intention and since she had provided part of the purchase price. Title to the home was in the son’s sole name. He borrowed money from the Abbey National Building Society (‘the lender’) to finance the purchase and granted the lender a charge over the home. The son was unable to meet the repayment obligations under the loan and the lender sought possession of the home. The mother argued that her equitable interest had priority over the charge. One of her arguments was that there was a notional gap (a moment in time or scintilla temporis) between the son’s acquisition of the title and the charge granted to the lender. She argued that her equitable interest attached to the property in that moment in time and so took priority over the charge.

The interpretation of the provisions of the Land Registration Act 1925 is an important feature of the judgments. Leaving this aside, the mother failed for what appear to be two (perhaps three) separate reasons. The first was that there is no moment in time in which the son had title to the home unfettered by the lender’s rights. The home could not have been acquired by the son without the aid of the loan. The acquisition of title to the home and the grant of the charge to the lender were a single composite transaction (Lord Oliver at 93 and Lord Jauncey at 102). The second reason given for the priority of the lender’s charge was that the mother knew that a loan would be needed to finance the purchase so that she must be taken to have accepted that the charge would have priority over her own interest (Lord Oliver at 94). Lord Oliver suggested a further argument in favour of the lender’s priority. Before completion it had agreed to advance funds on the security of a loan. This gave the lender an equitable interest that arose before the mother had any such interest (at 89).

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

Purchasers from squatters take subject to equitable interests of which they have notice

January 20, 2015

Re Nisbet and Potts’ Contract ([1906] 1 Ch. 386, CA (Eng)) concerned N’s contract to sell land to P. N’s title was possessory. The formal title had been defeated and there had been several conveyances of the possessory title before its conveyance to N. The contract beween N and P required P to accept this title. At the time of his purchase, N had not investigated title for the full forty years then demanded by conveyancing practice. Had he done so, investigating the paper title that had been defeated, he would have discovered that the paper title was subject to a restrictive covenant controlling what could be built on the land. P was a builder and he acquired the land with a view to building shops and other buildings on it. Before the contract was completed, the neighbour with the benefit of the restrictive covenant informed him of it and that proceedings would be brought in the event of breach. P refused to complete on the basis of this undisclosed encumbrance. The question was whether the covenant was binding on N; if so, P was justified in refusing to complete.

The English Court of Appeal held that a restrictive covenant is an equitable proprietary interest binding on all but a good faith purchaser for value without notice of it (Collins M.R. at 403; Romer LJ at 405 and 406). It was not defeated merely because the paper title had been extinguished. Time would only begin to run against the covenantee when there had been a breach so that the covenantee had a right to bring proceedings (Collins M.R. at 401 and 402).

The squatter himself is always subject to the covenant whether or not he had notice of it (Cozens Hardy L.J. at 410). A purchaser of the squatter’s title is subject to the restrictive covenant unless he is a good faith purchaser for value without notice (Cozens Hardy L.J. at 410). N was not such a purchaser. He had not investigated the title for the full forty year period  and so had constructive notice of any interests that he would have discovered had he done so. N’s title was subject to the restrictive covenant and P was entitled to resile from the contract.

Michael Lower

Effect of failure to register a written declaration of trust

July 15, 2014

In HKSAR v Lau Kam Ying ([2013] HKEC 1503, CFA)  Company X transferred the title to land to indigenous villagers. The villagers executed declarations of trust to the effect that each of them held his section on trust for company X. This declaration was never registered. Company X was wound up.  When the Government resumed the land, some of the villagers assigned their land to Company Y which had been set up to collect compensation on their behalf. They made false statutory declarations to the effect that the title deeds had been lost. These were then submitted to the Government as part of the process of claiming the compensation.

The leading players behind the scheme were convicted of conspiracy to defraud. They had falsely represented that company Y was a bona fide purchaser for valuable consideration and concealed the beneficial interest of company X. In this decision, the Court of Final Appeal rejected the defendants’ application for leave to appeal against the convictions.

The defendants argued, first, that the declarations were null and void as against company Y as a result of section 3(2) of the Land Registration Ordinance. This failed since sections 3 and 4 of the Land Registration Ordinance, ‘concern priorities between registered instruments but do not affect remedies which may be available whether in contract, tort or equity.’ (Tang P.J. at [19]). The second argument was that the declaration was unenforceable on the grounds of public policy. This would have failed anyway since company X would not need to plead an illegal act (Tinsley v Milligan) ([20]).

In any event, the conviction relied on the fact of the concealment not on whether company X had an indefeasible beneficial interest ([21]).



Equity’s darling

September 17, 2013

In Pilcher v Rawlins ((1871 – 72) LR 7 Ch. App. 259) a father set up a trust for his children. There were three trustees, one of whom was P the children’s uncle (a solicitor). The trustees advanced money to R on the security of a mortgage (the mortgage deed explained the existence of the trust). Two of the trustees died leaving P as the sole trustee.

P and R connived in a fraudulent scheme. R (also a solicitor) prepared an abstract of title making no mention of the mortgage. R then purported to convey the property to S and L (who had no notice of the trust or the fraud). Immediately before that P executed a deed reconveying the property to R free of the mortgage (despite the fact that the loan had not been repaid). P and R agreed that the reconveyance to R would only be produced if necessary. S and L had no notice of this conveyance either.

The fraud came to light and the beneficiaries sought a declaration that they were the beneficial owners and an order that S and L convey the title back to the trust. They failed on the basis that S and L were bona fide purchasers for value without notice of a legal estate (Sir G Mellish LJ at 273).

Given the facts above, the conveyance of the property by P to R (with its reference to the trust) was an essential element of S and L’s title. This did not fix them with constructive notice. They had acted diligently and at the time of the purchase had reasonably believed that they had good title. The later conveyance to R only came to light in the course of the proceedings. At the relevant time, S and L had ‘neither knowledge nor means of knowledge’ of the trust (Sir G Mellish LJ at 274).

Michael Lower

A contractual licence does not bind a mortgagee

February 4, 2011

A contractual licence does not bind a third party such as a mortgagee.

In Chartered Bank v Wong ([1987] HKLR 844) a man had given his mistress a contractual licence to occupy the family apartment until the two children had finished full-time education. The man then mortgaged the property but failed to keep up with the mortgage repayments. The Bank sought possession of the property but the mistress refused to leave. She claimed that she had an interest that was binding on the bank. It was held that she had only a contractual licence and there was no equitable dimension to her rights (such as a proprietary estoppel or constructive trust). Her licence was not binding on the bank. Garcia J suggested that the result might have been different if the bank had had actual notice of the licence. It is hard to see why this should make a difference.

Michael Lower

Occupation of the property as a source of constructive notice

October 6, 2010

In Wong Chim-Ying v Cheng Kam-Wing ([1991] 2 HKLR 253) a husband paid for a flat but it was transferred into the name of his wife. He lived in the flat with her and their children.  The wife sold the flat and absconded. The husband refused to leave and the purchaser sought possession of the property. The Court of Appeal held that the husband was the sole beneficial owner of the property. The purchaser had actual notice of his occupation and had not enquired as to whether or not he had any legal or equitable interest in it. Clough JA explained that, ‘The principle is that notice of occupation is notice of the occupier’s rights.’ (at 262)  As a result, the purchaser had constructive notice of the husband’s beneficial ownership. She held the property on trust for the husband and had to transfer the title into his name.

Michael Lower

Constructive notice: when is a purchaser or mortgagee put on enquiry?

October 6, 2010

When can a purchaser or mortgagee rely on an owner’s statement that there is no-one other than the owner living at the property? When must a purchaser or mortgagee make a physical inspection of the property to see whether there is anyone living there who might have an equitable interest under a resulting or constructive trust?

This question had to be considered in HKCB Finance v Yuen Yi Wan [2006] HKEC 230 (CA). A wife claimed an equitable interest in a property owned by her husband based on her financial contributions.  Her husband agreed to sell the property to Wong and Wong agreed a sub-sale to the first defendant. The sale to Wong was at a gross undervalue and the sub-sale was at a substantially higher price. The three were conspiring to defeat the wife’s claim to the property. The first defendant granted a mortgage to the plaintiff bank.The husband had replied to an enquiry by Wong’s solicitor saying that only he lived at the property. The sale and sub-sale agreements contained warranties to the effect that no-one else lived at the property with a legal or equitable interest in it. The bank had seen these agreements.

The question was whether the plaintiff bank had constructive notice of the wife’s equitable interest. Tang JA held that the wife had an arguable case that the bank had been put on enquiry as to her interest and should have made a physical inspection to see whether anyone else was living there. This was because her husband had sold the property at a gross undervalue and this is often a sign of a fraudulent transaction. If the bank had made the physical inspection they would have discovered the wife’s presence and she would have explained that she was claiming an equitable interest in the property.

Michael Lower