Mortgage – Enforcement – Overriding interest – Appellant unable to repay mortgage and selling flat at considerable undervalue – Purchasers promising that appellant able to continue living in flat indefinitely in return for monthly rent – Purchasers mortgaging property – Respondent mortgagee late seeking to repossess property – Appellant held to be entitled to set aside sale of flat – Whether that equity binding on respondent as overriding interest – Appeal dismissed
The appellant owned a leasehold flat in Maidstone. By late 2007, she was unemployed and unable to keep up with the mortgage repayments on the flat. Faced with the prospect of possession proceedings by the mortgagee, she contacted a company online with a view to refinancing. At that time, the flat was worth about £120,000 and the appellant owed £24,500. The owners of the company, S and C, told the appellant that the flat was worth only £30,000 and offered to buy it for that sum, on terms that the appellant could continue to live there indefinitely, rent-free for the first year and thereafter at a rent of £250 per month. The appellant accepted that proposal.
S and C then applied to the respondent for a buy-to-let mortgage of £102,000 secured on the flat, which was stated in their application to be worth £120,000. The appellant’s solicitor sent an “overriding interests questionnaire” for her to complete. The questionnaire informed the appellant that it was necessary for her to disclose all overriding interests of which she was aware, including rights of persons in occupation. The appellant completed the questionnaire without disclosing any such interests. The answers given by the appellant’s solicitor to requisitions on title indicated that vacant possession was to be given on completion.
The contract for sale of the flat for £30,000, with vacant possession and full title guarantee, was completed in October 2007 and the appellant’s outstanding mortgage was paid off. S and C initially financed their purchase with the aid of a bridging loan but later obtained a mortgage from the respondent. The flat was subsequently transferred into S’s sole name with the respondent’s consent.
When S failed to keep up the mortgage repayments, the respondent appointed receivers under the Law of Property Act 1925, who began possession proceedings against the appellant.
By her defence and counterclaim, the appellant contended that she was entitled to have the sale of the flat to S and C set aside. The judge accepted that contention, holding that the sale should be set aside as an unconscionable bargain, but held that the appellant’s entitlement was not binding on the respondent as an overriding interest under Schedule 3 to the Land Registration Act 2002, since the respondent was a bona fide purchaser for value who did not have notice of the appellant’s equitable right. The appellant appealed.
Held: The appeal was dismissed.
(1) A right to set aside a transaction on the ground that it was an unconscionable bargain was an equity in the same way as such a right founded on undue influence or representation. The right was a right to set aside the bargain that had been made and, accordingly, arose on exchange of contracts and not merely on completion of the sale. Such an equity was a right capable of enduring through successive ownerships and hence of sufficient proprietary character to qualify as an overriding interest capable of binding successors in title, although it would not necessarily do so: see section 116 of and schedule 3 to the Land Registration Act 2002. Accordingly, the appellant’s right to have the sale to S and C set aside was capable of being an overriding interest.
(2) The general proposition that an interest belonging to a person in actual occupation would be an overriding interest was subject to the various exceptions set out in para 2 of Schedule 3 to the 2002 Act. In the instant case, the judge had erred in holding that the exception in para 2(c) of Schedule 3 applied. The respondent’s lack of actual knowledge of the appellant’s occupation was not sufficient for that purpose in circumstances where the occupation would have been obvious on a reasonably careful inspection of the land.
(3) Nonetheless, the mortgage with the respondent had been made by S and C as joint registered proprietors. On completion of the transfer to S and C, they had been entitled to be registered as proprietors and were consequently entitled to exercise owner’s powers, which included the power to charge the estate at law with the payment of money: see sections 23 and 24 of the 2002 Act. By section 26, the right to exercise owner’s powers in relation to a registered estate or charge was to be taken to be free from any limitation affecting the validity of a disposition. Section 29 (3) made it clear that the purpose of section 26 was to prevent the disponee’s title from being called into question. If the right asserted as an overriding interest was a right to impugn the title acquired by the disponee, then section 26 defeated that right. That suggested that the appellant could not call into question the title acquired by the respondent.
(4) Further, the effect of the grant of a mortgage by two or more trustees was given by section 2 of the Law of Property Act 1925, under which a conveyance of a legal estate in land made by trustees of the land would overreach any equitable interest or power affecting that estate, regardless of notice, provided that the equitable interest was at the date of the conveyance capable of being overreached and the requirements of section 27 regarding the payment of capital moneys to both trustees were complied with. Those provisions were capable of operating in the context of registered land: City of London Building Society v Flegg [1988] AC 54. Where they applied, the potential overriding interest was shifted from the land to the sale or mortgage proceeds. Those provisions applied to the mortgage in the instant case. The appellant’s interest was of a kind falling within section 2(1) of the 1925 Act. Section 2(1) applied to any equitable interest affecting the estate and was not limited to beneficial interests under trusts; moreover, the thrust of section 116 of the 2002 Act was to assimilate mere “equities” of the kind claimed by the appellant and other more traditional equitable interests. The appellant’s interest was capable of being overreached since the appellant’s claim against S and C could, at least in theory, shift to the proceeds of the mortgage, which she could use to buy herself another home: Birmingham Midshires Mortgage Services Ltd v Sabherwal (1999) 80 P&CR 256; [1999] PLSCS 298 applied. It followed that, while the appellant did have an interest that was potentially an overriding interest, it was overreached by the grant of the mortgage by two trustees.
(5) Per curiam: While it was not necessary to decide in the light of the above conclusions, the better view was that the appellant’s right to have the sale to S and C set aside would not have been binding on the respondent since it fell within the exception in para 2(b) of Schedule 3 to the 2002 Act, namely an interest of a person of whom inquiry was made before the disposition and who failed to disclose the right when she could reasonably have been expected to do so. Inquiry had been made of the appellant before the grant of the mortgage to the respondent and she had not discloses the right that she was now asserting. While there was no right to disclosure before exchange of contracts, because the bargain had not yet been made, the requisitions on title made after exchange of contracts and before completion of the transfer confirmed that there had been no change in the information previously provided. In addition, the contract provided for vacant possession to be given on completion and the appellant gave a full title guarantee in the transfer; that guarantee included a presumption that she was disposing of the whole of her interest, that she had the right to do so and that she would do all she reasonably could to give the person to whom the disposal was made the title that she purported to give. While the appellant could not reasonably have been expected to have attached the label “unconscionable bargain” to the right that she now claimed, it would have been reasonable for her to disclose that she was not in fact giving vacant possession and that the lease would be encumbered in the hands of the purchasers by the tenancy that she had agreed to take. The respondent was entitled to rely on the appellant’s failure to disclose the true arrangement.
Robert Denman (instructed by Holden & Co LLP, of Hastings) appeared for the appellant; Nicole Sandells and Nicholas Broomfield (instructed by Eversheds LLP) appeared for the respondent.
Sally Dobson, barrister
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