City of London Building Society v Flegg

I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Templeman and Lord Oliver of Aylmerton. I agree with them and for the reasons they give I would allow the appeal and restore the order of Judge Thomas.

The appellants, City of London Building Society, are the mortgagee under a charge by way of legal mortgage of registered land held at the date of the charge by two trustees upon trust for sale and to stand possessed of the net proceeds of sale and rents and profits until sale upon trust for four tenants in common including the respondents, Mr. and Mrs. Flegg. The legal charge was entered into by the trustees in breach of trust, although the appellants were unaware of this. The respondents who were in actual occupation of the mortgaged land claim that the appellants' legal charge is subject to the respondents' overriding interest. The Court of Appeal declined to order the respondents to deliver up possession of the land to the appellants; hence this appeal.

By a conveyance dated 18 October 1977 the land appropriately named Bleak House was conveyed to Mr. and Mrs. Maxwell-Brown in fee simple upon trust for sale and to stand possessed of the net proceeds of sale and rents and profits until sale upon trust for the Maxwell-Browns as joint tenants. In fact, the purchase price paid by the Maxwell-Browns for Bleak House, amounting to £34,000, had been provided as to £18,000 or more by the respondents who were the parents of Mrs. Maxwell-Brown. In consequence and notwithstanding the express trusts set out in the conveyance, Bleak House was held by the Maxwell-Browns on trust for sale and to stand possessed of the net proceeds of sale and rents and profits until sale upon trust for the Maxwell-Browns and the respondents as tenants in common in the proportions in which they had respectively contributed to the purchase price. The respondents were entitled to occupy Bleak House together with the Maxwell-Browns as tenants in common under the trust for sale and all four beneficiaries duly went into occupation.

By a legal charge by way of mortgage dated 8 January 1982 the Maxwell-Browns charged Bleak House to secure £37,500 advanced by the appellants to the Maxwell-Browns. The respondents knew nothing of the legal charge which was granted by the Maxwell-Browns for their own purposes and in breach of trust. The appellants knew nothing of the respondents.

By section 27 of the Law of Property Act 1925 (as amended by the Law of Property (Amendment) Act 1926, Schedule):

"(1) A purchaser of a legal estate from trustees for sale shall not be concerned with the trusts affecting the proceeds of sale of land subject to a trust for sale … or affecting the rents and profits of the land until sale … (2) Notwithstanding anything to the contrary in the instrument (if any) creating a trust for sale of land or in the settlement of the net proceeds, the proceeds of sale or other capital money shall not be paid to or applied by the direction of fewer than two persons as trustees for sale, except where the the trustee is a trust corporation … ."

By section 205 of the Act of 1925 the expression "purchaser" as used in sections 27 and 28 includes a chargee by way of legal mortgage and the sum of £37,500 advanced by the appellants to the Maxwell-Browns was capital money within the meaning of section 27(2) and was duly paid to two persons as trustees for sale.

By section 28(1) of the Law of Property Act 1925, read in conjunction with section 71 of the Settled Land Act 1925, trustees for sale of land have powers to mortgage the land and:

"… all capital money arising under the said powers shall, unless paid or applied for any purpose authorised by the Settled Land Act 1925, be applicable in the same manner as if the money represented proceeds of sale arising under the trust for sale."

Section 17 of the Trustee Act 1925 provides that:

"No purchaser or mortgagee paying or advancing money on sale or mortgage purporting to be made under any trust or power vested in trustees, shall be concerned to see that such money is wanted, or that no more than is wanted is raised, or otherwise as to the application thereof."

Thus the appellants advancing money in good faith to two trustees for sale on the security of a charge by way of legal mortgage of Bleak House were not concerned with the trusts affecting the proceeds of sale of Bleak House or with the propriety of the trustees entering into the legal charge. As a result of the legal charge the interests of the beneficiaries in Bleak House pending sale were transferred to the equity of redemption vested in the Maxwell-Browns and to the sum of £37,500 received by the Maxwell-Browns from the appellants in consideration for the grant of the legal charge. The Maxwell-Browns did not account to the respondents for any part of the sum of £37,500 and defaulted in the performance of their obligations to the appellants under the legal charge. The appellants seek possession of Bleak House with a view to enforcing its security.

The respondents resist the claim of the appellant to possession of Bleak House and rely on section 14 of the Law of Property Act 1925.Sections 27 and 28 of that Act which overreach the interests of the respondents under the trust for sale of Bleak House are to be found in Part I of the Act.Section 14 provides that:

"This Part of this Act shall not prejudicially affect the interest of any person in possession or in actual occupation of land to which he may be entitled in right of such possession or occupation."

The respondents were in actual occupation of Bleak House at the date of the legal charge. It is argued that their beneficial interests under the trust for sale were not overreached by the legal charge or that the respondents were entitled to remain in occupation after the legal charge and against the appellants despite the overreaching of their interests.

My Lords, the respondents were entitled to occupy Bleak House by virtue of their beneficial interests in Bleak House and its rents and profits pending the execution of the trust for sale. Their beneficial interests were overreached by the legal charge and were transferred to the equity of redemption held by the Maxwell-Browns and to the sum advanced by the appellants in consideration of the grant of the legal charge and received by the Maxwell-Browns. After the legal charge the respondents were only entitled to continue in occupation of Bleak House by virtue of their beneficial interests in the equity of redemption of Bleak House and that equity of redemption is subject to the right of the appellants as mortgagee to take possession.Sections 27 and 28 did not "prejudicially" affect the interests of the respondents who were indeed prejudiced but by the subsequent failure of the trustees for sale to account to their beneficiaries for capital money received by the trustees. A beneficiary who is entitled to share in the proceeds of sale of land held on trust for sale relies on the trustees. Section 26(3) of the Act (as amended) requires trustees for sale to consult their beneficiaries and to give effect to the wishes of the majority of the beneficiaries "but a purchaser shall not be concerned to see that the provisions of this subsection have been complied with." If the argument for the respondents is correct, a purchaser from trustees for sale must ensure that a beneficiary in actual occupation is not only consulted but consents to the sale.Section 14 of the Law of Property Act 1925 is not apt to confer on a tenant in common of land held on trust for sale, who happens to be in occupation, rights which are different from and superior to the rights of tenants in common, who are not in occupation on the date when the interests of all tenants in common are overreached by a sale or mortgage by trustees for sale.

The Maxwell-Browns registered their title to Bleak House under the Land Registration Act 1925 with title absolute for a legal estate in fee simple in possession. They continued to hold Bleak House on trust for sale and to stand possessed of the net proceeds of sale and rents and profits until sale upon trust for the Maxwell-Browns and the respondents as tenants in common. By section 74:

"… neither the registrar nor any person dealing with a registered estate or charge shall be affected with notice of a trust express implied or constructive, and references to trusts shall, so far as possible, be excluded from the register."

By sections 2 and 18 proprietors of registered land may dispose of the land by transfer or by the creation of a legal estate including the grant of a legal charge by way of mortgage.Section 20(1) provides as follows:

"(1) In the case of a freehold estate registered with an absolute title, a disposition of the registered land or of a legal estate therein, including a lease thereof, for valuable consideration shall, when registered, confer on the transferee or grantee an estate in fee simple or the term of years absolute or other legal estate expressed to be created in the land dealt with … subject — ( a) to the incumbrances and other entries, if any, appearing on the register; and ( b) unless the contrary is expressed on the register, to the overriding interests, if any, affecting the estate transferred or created, but free from all other estates and interests whatsoever … and the disposition shall operate in like manner as if the registered transferor or grantor were (subject to any entry to the contrary in the register) entitled to the registered land in fee simple in possession for his own...