Transfer of property to sitting tenant — Discounted price — Transaction at undervalue — Protection of accrued rights of innocent third party — Court of Appeal holding that tenant was protected tenant prior to purchase — First instance court order varied
In 1987, B agreed to transfer 27 Denziloe Avenue, Hillingdon, Middlesex, to S, a sitting tenant, for £50,000 as an apparent sale at a price discounted from £75,000. The price actually paid was £31,000 outstanding on a mortgage. The Chelsea Building Society gave S a £25,000 loan who then provided the balance. S executed a trust deed holding the property on trust for M to whom B owed money. C was a judgment creditor of B and applied to the court for a declaration that the transfer from B to S was made with intent to defeat his claim within section 423(1) and (3) of the Insolvency Act 1986 and orders that the property be sold and that S should give vacant possession thereof.
The High Court held that there was a transaction at an undervalue, but refused to set aside the transfer although the judge set aside the trust deed. He also declared that S held the equity of redemption of the property upon the mortgage to the Chelsea Building Society upon trust for sale as to 19/75ths for B and as to 56/75ths for herself. Chelsea Building Society was registered as first legal chargee. C appealed arguing that S was a licensee and not a tenant of the property and that the judge should have set aside the transfer or at least adjusted the proportions of the beneficial interest in the equity of redemption more in B’s favour.
Held The appeal was allowed in part; as between vendor and purchaser the amount owing under the building society’s charge debited wholly against purchaser’s share.
1. On facts, S had obtained exclusive possession and therefore a tenancy (and necessarily a protected tenancy) of the whole of the property before the freehold was transferred to her on November 17 1987: see Street v Mountford [1985] 1 EGLR 128. That position was not invalidated by B’s having made frequent visits for his own purposes between July and October 1986. The natural inference was that once he had ceased to occupy one of the bedrooms and S started to pay an additional rent for it, his visits were not made pursuant to any enforceable legal right. Even if there were the reservation of some minimal right it could not have reduced S’s status to that of a licensee. Thus, the judge was right to conclude that she had a protected tenancy.
2. It was open to the judge to set aside the trust deed, but not the transfer since the power under section 423(2) of the Insolvency Act to make an order was a power to protect the interest of the victims of the transaction so far as practicable.
3. The judge was right to award B a share which, had the property been unencumbered, would have been worth £19,000. However, he was wrong, as between B and S, to apply that share to the equity of redemption in the property. On the footing that the property was sold with vacant possession for £75,000 and that the amount outstanding under the legal charge in favour of Chelsea Building Society was £25,000 (the present amount of the debt), the judge’s order would produce for B, not £19,000 but £12,666. It would not restore the asset lost.
4. Accordingly, the court would vary his order by providing that as between B and S the amount owing under the legal charge in favour of Chelsea Building Society should be debited wholly against her 56/75ths share of the beneficial interest in the property.
Sir William Goodhart QC and David Parry (instructed by Singh & Choudry) appeared for the appellant (C); Peter Ralls (instructed by Lass Salt Garvin) appeared for the respondent (S); Richard Ritchie (instructed by Kenwright & Cox) appeared for the Chelsea Building Society.
