As a general rule, where land is unregistered, legal charges created earlier in time will take priority for payment over charges that are created subsequently. By contrast, where land is registered, priority is governed by the order in which charges are registered in the charges register, and not by the date of their creation. The order in which charges are registered will depend upon the dates upon which the lenders apply for registration and, crucially, upon whether an application has been protected by an official search against the borrower’s title.
In Scottish & Newcastle plc v Lancashire Mortgage Corporation Ltd [2007] EWCA Civ 684; [2007] PLSCS 146, the lender asked the court to decide whether a legal mortgage that had been intended to take effect as a first legal charge, but which was registered as a second legal charge, could, none the less, take priority over a charge in favour of the brewery on the grounds that there was a proprietary estoppel in the lender’s favour.
The essence of the lender’s case was that the brewery had acquiesced in the transaction, in which the lender had advanced £30,000, knowing that the lender believed that it would have a first legal charge over the borrower’s property in priority to the brewery. The lender argued that the brewery was acting unconscionably in maintaining that its charge, which had been entered into immediately after the lender’s charge but which had been registered first, had priority over the lender’s charge, because the brewery had accepted payment of £20,000 from the lender’s advance in partial discharge of sums owed by the borrower to the brewery.
The brewery argued that: (i) section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires contracts for the sale or disposition of interests in land to be in writing; (ii) there was no written agreement dealing with the priority of the respective charges that satisfied the requirements of section 2; and (iii) the general principle of estoppel could not be used to circumvent the requirements of the statute.
The court ruled that the parties had not entered into a contract to sell or dispose of an interest in land. They had varied the beneficial interests in the proceeds of sale. The doctrine of equitable estoppel coincides with, or overlaps, the concept of constructive trusts. The creation and operation of constructive trusts are expressly excluded from the requirements of section 2, and there was a constructive trust of the proceeds of sale that prevented the brewery from asserting that it was entitled to be paid before the borrower’s debt to the lender was discharged.
The decision serves as a reminder that, in transactions involving a series of charges, it is always preferable to enter into a “deed of priority” formally documenting their priority. In addition, if land is registered, a lenders should, to protect its priority, make an official search before completing a mortgage advance and should apply for registration of its charge within the priority period offered by its search.
Allyson Colby is a property law consultant
