Leeds Permanent Building Society v Fanimi and another

Building society loan to be secured by way of legal charge – Legal charge not executed – Legal charge and transfer not registered – Mortgagor letting property in breach of building society’s standard form of legal charge – Whether tenant’s interest overriding building society’s interest – Judge holding building society’s interest overriding interest of tenant – Tenant’s appeal dismissed In 1986 the first defendant applied for a mortgage from Leeds Permanent Building Society (the Leeds) for a loan of £31,000 to purchase 39 Downhills Way, London N17, from the vendor for £56,000. The Leeds agreed to the loan, secured by way of a charging order, and in October 1986 the money was released to the first defendant’s solicitor. However, the first defendant’s solicitor did not follow the normal practice and the Law Society intervened. Solicitors appointed by the Law Society informed the Leeds that the transfer of the property to the first defendant had been completed but that the forms of mortgage had not. The Leeds’ form of mortgage contained a provision excluding the statutory power of leasing whereby the mortgagor consented not to create any lease or tenancy. On December 12 1988 the legal charge was duly executed. On December 21 1988 both the transfer of the property and the legal charge were registered. However, by the end of March 1988 the first defendant had granted the second defendant an oral tenancy of the property, and on November 1 1988 granted a written tenancy for one year with an option to renew for a further year. The Leeds was not informed, and did not consent to the tenancy. On December 7 1988 the Leeds commenced proceedings for possession of the property. The second defendant contended that he had an overriding interest in the property by reason of section 70(1)(g) of the Law of Property Act 1925 by being in actual occupation at the time of the execution of the legal charge, and that such interest bound the Leeds. The judge found that there was an express agreement between the Leeds and the first defendant that in consideration of the advance of £31,000 he would charge the property to the Leeds, and that the charge would be in the terms of the Leeds’ form of legal charge, which included the covenant not to give a lease or tenancy of the property. The judge held that that agreement was specifically enforceable, that an equitable mortgage had been created and that the Leeds’ interest was in priority to the second defendant’s tenancy. The second defendant appealed. Held The appeal was dismissed. 1. On the date of registration the property was not subject to an overriding interest under section 70(1)(k) of the Law of Property Act 1925. The first defendant’s interest had always been subject to the interest of the Leeds and it was out of that that the tenancy had been granted. Therefore the second defendant’s interest did not prevail over the Leeds’ priority: see Abbey National Building Society v Cann [1991] 1 AC 56. 2. Although the second defendant’s tenancy had become statutory at the end of the first year, the first defendant was not the registered proprietor at the time of the grant of the tenancy. Therefore the priority of the Leeds prevailed: see Pourdanay v Barclays Bank plc The Times November 12 1996. Marcus Smith (instructed by Booth & Co, of Leeds) appeared for the plaintiff; the second defendant appeared in person; the first defendant did not appear and was not represented.