Property – Legal charge – Option to purchase – Overriding interest – Lease – Claimant bank granting loan to first defendant subject to registered charge over property – Second defendant holding lease over property containing unregistered option to purchase – Third defendant being assignee of option – First defendant being made bankrupt – Defendants contending option taking priority over claimant’s charge as overriding interest – Claimant seeking declarations as to priority of charge – Whether second defendant in actual occupation of property – Whether claimant having actual knowledge of option – Whether option having priority over charge – Declarations granted
The first defendant was the registered owner of a property at 17 Craven Park, north west London. The claimant bank had loaned him £516,999 by way of a land loan, subject to a legal charge over the property. The charge was registered at the Land Registry in March 2008. The loan was not repaid and the bank appointed fixed charge receivers over the property. After the first defendant was made bankrupt, the property vested in the official receiver, pursuant to section 283 of the Insolvency Act 1986.
The second defendant claimed to have a commercial tenancy of the property containing an option to purchase the property from the first defendant. Although the option had not been registered, the second defendant contended that it had been exercised and was an overriding interest with priority over the claimant’s charge. The third defendant was the assignee of the option to buy. The second defendant sought to exercise his option to purchase by serving a notice on the fixed charge receivers. The claimant applied to the court seeking declarations in respect of the priority of its charge. The defendants argued that the option to buy amounted to an overriding interest binding on the claimant which had been aware of their interests, which had been disclosed by the first defendant to the claimant’s representative in certain documents, including a “lease rider”. The claimant denied any knowledge of such interests and questioned whether some of the documents relied upon were genuine. In any event, even if the option was binding, it had never been validly exercised because, after the first defendant had become bankrupt, the appropriate person on whom to effect service of the exercise was the official receiver, who had not been served.
Issues arose: (i) whether the option to purchase in favour of the second defendant had existed when the charge was executed; (ii) whether the second defendant had been in actual occupation at the date of the execution of the charge; and (iii) if so, whether the interest claimed fell within the exception in paragraph 2(c) of Schedule 3 to the Land Registration Act 2002, as one “which belongs to a person whose occupation would not have been obvious on a reasonably careful inspection of the land at the time of the disposition …of which the person to whom the disposition is made does not have actual knowledge at that time”.
Held: The declarations were granted
(1) Sections 29 and 30 of the 2002 Act provided that a registration of a registered charge granted for valuable consideration had priority over unregistered interests. As the option to purchase was unregistered, it would only bind the claimant if the second defendant could establish an overriding interest. In order to establish an overriding interest, the defendants had to show that: (i) there was a relevant interest at the date of the registration of the charge; and (ii) the individual with the benefit of the interest had been in actual occupation of the property at the date the charge was created. If an option existed and constituted an overriding interest, then the option had to have been validly exercised: Abbey National Building Society v Cann [1991] AC 56 applied.
(2) To establish actual occupation, there had to be physical presence, although the physical presence needed not be personal, provided the presence was that of an employee or agent. If the person in actual occupation was not physically present at the relevant time, it would usually be necessary to show that his occupation had been manifested and accompanied by a continuing intention to occupy. The occupation had to be considered in the context of the nature of the land and the surrounding facts.
To fall within the exception in paragraph 2(c) of Schedule 3 to the 2002 Act, it had to be shown that the occupation would not have been obvious on a reasonably careful inspection of the property at the time of the granting of the charge, and that the claimant had not had actual knowledge of the interest claimed. The test was objective. It was actual knowledge of the option to purchase that was relevant, not knowledge of the occupation or some other interest: Thompson v Foy [2009] EWC (Ch) 1076; [2009] PLSCS 166, Thomas v Clydesdale Bank plc [2010] EWHC 2755 (Ch); [2010] PLSCS 298 and Chaudhury v Yavuz [2011] EWCA Civ 1314; [2011] PLSCS 275 applied.
(3) After the making of a bankruptcy order, the notice under the option to purchase should have been served on the official receiver, pursuant to section 283 of the 1986 Act. The fixed charge receivers were the special agents of the first defendant borrower but were not agents of the official receiver: Sheffield & Regional Properties Ltd v Wright [2004] 1 P & CR 2 and Dolphin Quays Developments Ltd v Mills [2008] EWCA Civ 385; [2008] PLSCS 115 considered.
(4) On the facts of the present case, the court was satisfied that the option to buy agreement and the lease rider had not been created in 2008, but after 2010. Further, none of the 2006 documents, if any of them existed, had been shown to the claimant prior to the creation of the legal charge in 2008, no business had been carried on at the property in 2008 and neither the first nor second defendants had been in occupation of the property in 2008. It followed that the claimant had had no actual or constructive knowledge of any interest in the property other than that of the first defendant in 2008 and no means of knowing if any such interest existed. The claimant had not had notice of any business carried on at the site in 2008 or occupation of the property. Even if there was a genuine option to buy, it had not been validly exercised prior to the end of the lease: Mullarkey v Broad [2007] EWHC 3400 (Ch) considered.
Francis Collaco Moraes (instructed by Berman Leighton Paisner) appeared for the claimant; The defendants appeared in person.
Eileen O’Grady, barrister
Read a transcript of National Westminster Bank Plc v Tummond and others here
