N3 Living Ltd v Burgess Property Investments Ltd [2020] EWHC 1711 (Ch) concerned a contract for sale made in July 2019, which was not due to be completed until January 2020. Shortly before completion, the buyer discovered that a third party had applied to register a restriction against the title in Form A – a type of restriction entered on the register to prevent a sale by a sole proprietor without a court order (unless the seller is a trust corporation).
The buyer’s official search certificate stated that the Land Registry was not yet in a position to complete the registration of the restriction. However, the pending application would have priority over the sale to the buyer. And this precipitated a dispute between the buyer and seller, who found themselves unable to agree what should be done in order to complete the sale.
It seems that a member of the seller’s family considered that she was entitled to a share in the property, following a previous death in the family. She did not object to the sale itself – and sought only to protect her share of the proceeds of sale. So she suggested that the proceeds of sale should be held separately, until the family dispute was settled.
The seller’s solicitors suggested that the seller should execute a transfer in favour of himself and a second trustee, and that both trustees should then execute a transfer in favour of the buyer, thereby transferring any equitable interest in the land from the land itself to the capital money paid to the trustees – a process known as “overreaching”. But they subsequently opted for a single transfer to the buyer – containing provisions appointing a further trustee and which was to be executed by both trustees – instead.
Unfortunately, the buyer’s solicitors did not believe that these solutions would work and expressed concern that their client might become a party to a breach of trust. The disagreement culminated in the buyer issuing a vendor and purchaser summons under section 49 of the Law of Property Act 1925 (LPA). When the case came on, the judge suggested that the seller should provide an undertaking to the court, as a result of which the application to register a restriction was withdrawn and the sale was completed.
However, the judge still had to consider the rights and wrongs of the solutions proposed by the seller, in order to award costs. He explained that both suggestions would have resulted in the buyer becoming the registered proprietor of the property, free from the equitable interest that was claimed. Overreaching is possible even where a buyer knows of the existence of the equitable interest: section 2(1) of the LPA. And buyers are not concerned with the trusts affecting a property or with the proceeds of sale (after they are received by the trustees (section 27(1) of the LPA) or with the subsequent application of them: section 17 of the Trustee Act 1925.
Consequently, the buyer’s solicitor ought to have understood that the alternatives proposed were both conventional conveyancing solutions to deal with restrictions in Form A, and they are clearly explained by the Land Registry in its practice guidance. Furthermore, taking advantage of the overreaching effect of section 2 of the LPA would not amount to a lack of good faith and it is not a breach of trust for sellers to retain proceeds of sale as trustees without putting them into an escrow account.
Allyson Colby, property law consultant
