Mortgage – Overriding interest – Undue influence – First defendant purchasing property from second defendant with aid of mortgage secured on property – Sale set aside on grounds of undue influence but charge remaining in place – Possession claim by claimant mortgagee – Summary judgment against second defendant on defence of overriding interest within section 7(1)(g) of Land Registration Act 1925 – Whether claimant making adequate enquiry of second defendant’s interest – Whether overriding interest point should have been raised in earlier proceedings – Second defendant’s appeal allowed
In 2001, the second defendant sold a property to the first defendant at the notional price of £225,000. However, the first defendant paid only £145,000, raised by way of a mortgage with the claimant bank secured by a charge on the property; he obtained the remainder of the purchase price under a deed of gift granted by the second defendant. In proceedings between the second and first defendant, in which the claimant participated, the court determined that the contract for sale and the transfer had been procured by undue influence and were unconscionable bargains. It ordered that the property should be re-registered in the second defendant’s name but subject to the claimant’s charge.
A hearing subsequently took place in possession proceedings that the claimant brought against the defendants in respect of the property; that claim had been stayed pending the outcome of the earlier proceedings. The second defendant contended, under section 70(1)(g) of the Land Registration Act 1925, that she held an overriding interest in the property as a person in actual occupation at the time of the transfer to the first defendant. The claimant argued that such a contention was an abuse of process since it should have been raised in the earlier proceedings involving the same parties. Its application to strike out the second defendant’s defence on that ground was dismissed, but summary judgment was granted in its favour on the ground that the second defendant had no overriding interest. The second defendant appealed against the summary judgment, and the claimant appealed against the refusal to strike out the second defendant’s defence.
On the issue of the summary judgment, the claimant relied upon the proviso to section 70(1)(g), maintaining that it had made enquiry of the second defendant as a person in actual occupation and her rights had not been disclosed. It relied upon the second defendant’s answer to a property information questionnaire and her replies to requisitions on title, in which she had stated that only she lived at the property and that vacant possession would be provided.
Held: The second defendant’s appeal was allowed; the claimant’s appeal was dismissed.
(1) The overriding interest protected by section 70(1)(g) was that of a person in actual occupation of the land. However, that interest would be abrogated by the proviso to the section if enquiry were made of such a person and his or her rights were not disclosed. Accordingly, in order to be protected, the claimant had first been obliged to enquire as to whether there would be persons in actual occupation. If that were the case, it then had to enquire, at a second stage, into the rights that such persons claimed in the property or that entitled them to occupy it. Although that was a mechanical enquiry, the question had to be directed so as to obtain an answer that would disclose the rights claimed. The claimant could escape only if, upon making an appropriate enquiry of the person who was, or would be, in actual occupation regarding their rights, those rights were not disclosed. The claimant had not made adequate enquiry since it had not carried out the second stage. Merely enquiring as to whether the second defendant would be in actual occupation was not sufficient. Since the claimant had made no enquiry of the kind envisaged by the proviso, the court was unable to say, without further evidence, that the proviso was triggered. Accordingly, summary judgment should not have been granted.
(2) The proceedings between the second and first defendants had concentrated on the relationship between those two parties, and, consequentially, between the first defendant and the claimant. They were not directed to the secondary question of what might happen were the transaction between the second and first defendants to be set aside on one or more of the grounds alleged, such that the property was re-registered in the second defendant’s name. Moreover, given that the possession proceedings had been stayed to enable the other action to be determined first, it had always been known that, once it was determined, the possession claim would have to proceed. Further, the second defendant was not contending that the claimant’s charge was invalid, but only that she was unaffected by it owing to her overriding interest. In those circumstances, the second defendant’s defence could not be viewed as a collateral attack upon the earlier judgment, nor did it amount to unjust harassment of the claimant: Johnson v Gore Wood & Co (No 1) [2002] 2 AC 1 applied.
Peter Kirby (instructed by Underwood & Co) appeared for the claimant; Julian Greenhill (instructed by Prince Evans) appeared for the second defendant; the first defendant did not appear and was not represented.
Sally Dobson, barrister