Key points
- Overriding interests are subject to, and are trumped by, the rules on overreaching
- The rules on overreaching are not confined solely to interests arising under trusts
Struggling homeowners who entered into sale-and-leaseback agreements to escape from debt have not fared well in subsequent litigation against lenders who funded the purchases. Mortgage Express v Lambert [2016] EWCA Civ 555; [2016] PLSCS 173 is the latest in a long line of such cases. It also casts new light on the effect of section 2 of the Law of Property Act 1925, which governs overreaching.
The case concerned a flat owner who was in desperate financial straits. As a result, she sold her leasehold interest to two buy-to-let investors for £30,000, even though it was worth considerably more, on the understanding that she would be entitled to remain in the flat as a tenant. The buyers funded the purchase with a bridging loan from a third party. This was discharged soon afterwards and replaced by a registered charge in favour of Mortgage Express, securing a substantial loan to the buyers.
In the litigation that followed when arrears of rent and mortgage payments began accruing, the trial judge ruled that the sale was an unconscionable bargain. The seller had been desperate, vulnerable, naïve and lacking in any business sense, and the buyers had taken unfair advantage of her by making her an offer that they knew to be dishonest. Consequently, the seller was entitled to have the bargain set aside. The question that the Court of Appeal had to answer was: how did this affect the proprietor of the registered charge?
Overreaching
By analogy with authorities dealing with misrepresentation, undue influence and fraud, the court classified the seller’s right to have her bargain set aside as an “equity” or “a mere equity”. It arose on exchange of contracts and, subject to the rules about priority, was capable of binding successors in title: section 116 of the Land Registration Act 2002 (“the 2002 Act”).
However, the buyers were joint registered proprietors. Consequently, they held the legal estate as trustees for sale. Furthermore, the money that they had borrowed was paid to them in that capacity and the legal charge in favour of the lender was a “conveyance” for the purposes of section 2 of the Law of Property Act 1925 (“the 1925 Act”).
The combined effect of sections 2(1) and 2(1)(ii) of the 1925 Act is that, when capital sums are paid to trustees for sale, a conveyance to a purchaser of a legal estate in land “shall overreach any equitable interest or power… capable of being over-reached… affecting that estate, whether or not he has notice thereof”. In such cases, claims against the land attach to the sums received instead. So the question was: was the seller’s interest an interest that was “capable of being overreached”? The court decided that it was.
The court refused to distinguish a “mere equity” from “an equitable interest or power” for the purposes of section 2(1), or to rule that section 2(1)(ii) applies only to beneficial interests arising under trusts. The section applies to “any” equitable interest or power. Furthermore, the list of exclusions from overreaching in section 2(3) of the 1925 Act – which includes restrictive covenants, equitable easements, liberties and privileges, and estate contracts, options and rights of pre-emption – demonstrates that the ambit of overreaching is very wide. Therefore, section 2(1)(ii) is not restricted solely to equitable interests arising under trusts.
Lewison LJ added that the right to have a transaction set aside is not a right that makes no sense unless it attaches to land itself. So the right could, in theory, shift to the sum lent to the buyers, which the seller could then use to buy herself another home.
Overriding interest
Overriding interests are subject to the rules on overreaching – and interests that are overreached cannot override. So there was no need to consider the seller’s argument, that her right to undo the sale constituted an overriding interest which had overridden the registered charge, because she had been in occupation throughout.
The court dealt with this briefly anyway. The difficulty was that the 2002 Act provides that an interest will not override a registered disposition if it belongs to an occupier of whom enquiries were made, who failed to disclose his or her right when he or she could reasonably have been expected to do so: schedule 3 paragraph 2(b).
The court took the view that it would have been reasonable for the seller to have disclosed, in her replies to the buyers’ enquiries and requisitions on title, that she was expecting to stay in the property as a tenant. Unfortunately, she did not do so, which put paid to her claim to an overriding interest.
Rough justice
An interest that would constitute an overriding interest in the case of a sale by an individual shifts to the sums received when a sale or mortgage is made by two trustees and the capital monies are paid to both of them. Why should the remedies available to claimants differ, depending on whether the law on overreaching applies? The answer may be that this is simply the luck of the draw.
Overreaching was designed to enable trustees to dispose of property more freely, while ensuring that the rights of beneficiaries attach to the sale or mortgage proceeds instead: see “Overreaching: beneficiaries in occupation” (Law Com No 188/1989). This case demonstrates how easily equitable interests can be cleared from the title. Sadly, it also reveals that beneficial interests can be defeated when things go wrong, even though this was not the intention.
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Allyson Colby is a property law consultant
