Scottish & Newcastle plc v Lancashire Mortgage Corporation Ltd

  Lord Justice Mummery The issue 1.                  This appeal is from an order of HHJ Howarth dated 24 February 2006. The issue is whether the judge was correct in holding that estoppel altered the priority of the parties’ legal charges. The legal charges were executed and registered in the following order. 2.                  On 6 October 1999 Mr Harold Pexman (who has since died) and his wife, Mrs Diane Pexman, (the Pexmans) executed a legal charge on their jointly owned house at 109 Wellington Street, Grimsby (the House) in favour of the respondent Lancashire Mortgage Corporation Limited (LMC), who registered their charge on 17 November 1999. The title to the House is registered at HM Land Registry. 3.                  On 7 October 1999 the Pexmans executed a legal charge on the House in favour of the appellant brewery Scottish & Newcastle PLC (S&N), who applied to have their charge registered on 15 October 1999 at a time when LMC did not have the protection of a priority search. 4.                  According to the relevant provisions of the Land Registration Act 1925 then in force (section 29) priority is governed by the order of entry in the Charges Register, and not by the order of creation so that  S&N’s legal charge on the House had priority over LMC’s legal charge.   However, the judge went on to hold that, by virtue of estoppel by convention or proprietary estoppel, S&N were prevented from denying that their legal charge ranked behind LMC’s legal charge. He made a declaration that LMC’s charge ranked in priority over S&N’s charge. He ordered the rectification of the register by entry of an appropriate notice on the register to reflect the declaration of the priority of LMC’s charge over S&N’s charge. 5.                  The judge granted S&N permission to appeal against his order. Background 6.                  Mr Harold Pexman was the proprietor of Aitch’s Club and Fish Bar (the Club), which is located at the corner of two roads and has frontage to both Weelsby Street (Nos 283a, 285, 287 and 287a) and Wellington Street (Nos 235 and 237), Grimsby. The title to the Club’s premises was registered at HM Land Registry in the sole name of Mr Pexman. 7.                  S&N supplied drink to the Club under a trading agreement of October 1993. At all relevant times S&N’s Recoveries Manager was Mr Graham Sykes. S&N had a registered charge over the Club’s premises securing the sums due from Mr Pexman under the Club’s account with them. At that time S&N had no charge over the House. 8.                  The House was, however, subject to (i) a registered legal charge dated 19 May 1978 in favour of the local authority (formerly the Grimsby Borough Council, now the North East Lincolnshire Council) to secure the sum of £550 and (ii) a caution in favour of First National Bank for £5,000. 9.                  As at June 1999 the Club owed S&N £58,322.29. This figure is taken from a statutory demand made by S&N on Mr Pexman in June 1999. 10.              In about December 1998 Mr Pexman attempted to re-finance the indebtedness to S&N. The Pexmans applied to LMC for a loan of £46,000. LMC were prepared to make a loan of this amount on the security of a first legal charge on both the House and the Club. S&N hoped to be paid £36,000 out of the advance, leaving a balance owing to them of about £13,000, which the Pexmans would repay by monthly instalments over 10 years. 11.              Updating valuations of the Club and the House revealed that they were worth less than previously estimated. The Club was valued at about £35,000. The House was valued at about £30,000. 12.              In May 1999 LMC reduced the original loan offer from £46,000 to £30,000, from which S&N were to be paid £20,000. The Pexmans accepted the reduced offer. It was made clear in the offer by LMC to the Pexmans that the loan was to be secured by a first legal charge over both the Club and the House.            13.              LMC advanced £30,000 to the Pexmans. £20,000 of the advance was paid to S&N on 8 October 1999, thereby reducing the indebtedness of the Pexmans to S&N. As already mentioned, both LMC and S&N were granted legal charges over the House and they were registered on the dates mentioned. The local authority charge on the House and the caution in favour of First National Bank were both redeemed out of the monies advanced by LMC. 14.              As for the Club, it was common ground between the parties that LMC should have had a first charge over it. Registration of the legal charges on the Club was amended by agreement to reflect LMC’s priority. 15.              The parties were unable to reach agreement on the priority of the legal charges over the House. Priority matters, as the Pexmans fell into arrears with their repayments.  LMC obtained orders for possession of both the House and the Club.  There was a shortfall on the sale of the Club and the net proceeds of sale of the House are insufficient to meet both LMC’s and S&N’s claims in full. 16.              On 20 September 2001 S&N asserted priority for their legal charge on the House. This prompted legal proceedings by LMC for a declaration that that their charge on the House ranks in priority to that of S&N, even though the latter was registered first. 17.              LMC’s claim to priority is based not on the statute, but on estoppel. First, it is claimed that estoppel by convention operated to prevent S&N from denying LMC’s priority. The judge upheld this claim on the basis that there was, as he found, an arrangement, understanding and/or a common state of affairs acted on by the parties. It was to the effect that, in consideration of LMC completing its re-mortgage and advancing monies to be used in partial discharge of S&N’s indebtedness, LMC would be entitled to a first registered charge on the House. In reliance on this LMC had acted to their detriment in making the advance of £30,000. The particulars of claim pleaded in detail the correspondence passing between the solicitors who acted in the re-mortgaging transaction. 18.              Alternatively, the judge held that the same result followed from proprietary estoppel: S&N had acquiesced in the actions of LMC in the knowledge that they believed that their legal charge on the House would have priority over S&N’s legal charge.         19.              The judge stated his conclusions on the estoppel point as follows- “65. I find that the brewery [S&N], through Mr Sykes, knew that the company [LMC] would only advance £30,000 to Mr and Mrs Pexman if it was to be granted a first charge over the house as well as the club. Out of the £30,000, the brewery were to receive and did receive £20,000 plus costs plus Land Registry fees. In the alternative I find knowing of the above intention on the part of the company, the brewery acquiesced in the transaction going through on that basis when it was called on in conscience to contradict that assumption if it wished to assert something to the contrary. The brewery failed to do so. Either way, I find that the brewery are now estopped by convention from denying that its charge over the house ranks behind the company’s charge over the house. 66. Proprietary Estoppel If it is necessary for the company to rely on this doctrine, then the same result is achieved, for the above mentioned reasons.”     20.              I propose to deal with LMC’s alternative case of proprietary estoppel first, leaving the question of estoppel by convention for later consideration. 21.              The essence of LMC’s case on proprietary estoppel is that S&N acquiesced in LMC making the advance of £30,000, knowing of LMC’s belief that they would have a first legal charge over the House in priority to S&N, who accepted payment of £20,000 out of LMC’s advance, together with costs and Land Registry fees. In these circumstances it was unconscionable for S&N to assert or maintain, as against LMC, that their legal charge over the House had priority over LMC’s legal charge, so as to entitle them to be repaid out of the net proceeds of sale of the House before LMC were repaid.    Estoppel facts  22.              The judgment set out in detail the evidence and the judge’s findings, some of which were challenged by S&N on the appeal as being against the weight of the evidence. Mr David Marks, who appeared for S&N, took the court through the relevant correspondence and other documents. He also referred to passages in the witness statements and in the transcripts of the oral evidence. 23.              After considering the material on which Mr Marks relied and the submissions of Mr Putnam, who appeared for LMC, I am satisfied that the judge was entitled to make the findings of fact on which LMC’s case of proprietary estoppel is based. The facts on which the case for proprietary estoppel is founded can be stated briefly, but, as Moore-Bick LJ pointed out in the course of argument, they need to be analysed carefully. It is not enough for LMC simply to assert to the court, as if it were sitting under a palm tree on a legal and evidential desert island, that it would be unfair for S&N to rely on their statutory right to priority. 24.              In fact the evidential starting point is not promising for LMC. There was no direct communication or contact between LMC and S&N about the legal charges on the House before they were executed. No contract between S&N and LMC relating to the priority of their legal charges was pleaded. The parties left the conveyancing mechanics of the re-financing transactions to be dealt with by their solicitors: the Pexmans’ solicitor was Mr Simon Jones of Messrs EC Lidster &Co, and he corresponded with the solicitor acting for LMC, Mr Esterkin of Messrs Boote Edgar Esterkin, and the solicitor acting for S&N, Mr Ivan Jones of Messrs Birchell Blackman. Prior to the charges Mr Esterkin and Mr Ivan Jones did not directly correspond with one another.  25.              All of the solicitors involved gave oral evidence at the trial, which lasted for three days in November 2005. As the events had occurred six years previously it was only to be expected that the witnesses and the judge relied heavily on contemporaneous correspondence and other documents. Unfortunately, as the judge noted, the documents were incomplete. Solicitors’ files containing, for example, attendance notes of telephone calls were not obtained or put in evidence. 26.              Mr Simon Jones was aware that, as a term of the £30,000 advance to his clients, LMC required a first legal charge over the Club and the House and that the existing charge in favour of the local authority and the caution in favour of the First National Bank would be discharged. 27.               Mr Simon Jones corresponded with Mr Ivan Jones. The judge said that, where their evidence conflicted, he preferred the evidence of Mr Simon Jones as more consistent with contemporaneous documents. Mr Simon Jones also corresponded with Mr Esterkin.  28.              A point pressed by Mr David Marks, in his written and oral submissions for S&N, was that Mr Simon Jones, as solicitor for the Pexmans, had no authority to act for either S&N or LMC. This admitted absence of authority did not, however, affect Mr Simon Jones’s ability to obtain relevant information about the re-financing transaction and to make it available to Mr Ivan Jones and Mr Esterkin. As the judge said (paragraph 42) Mr Simon Jones was also “the point of contact between the company [LMC] and the brewery.” Messages were sent through him by the other parties to the transaction.  29.              A crucial fact found by the judge was that, prior to the granting of the legal charges, Mr Simon Jones had direct contact with Mr Graham Sykes, S&N’s Recoveries Manager. He found that, in the course of a telephone conversation early in May 1999 and prior to writing a letter of 4 May mentioned below, they had a conversation about S&N’s charges ranking second to those of LMC. The judge found that Mr Simon Jones believed that he achieved this and that S&N, through Mr Sykes, understood this to be the case, that this understanding was shared by S&N and LMC and that, in this knowledge, S&N acquiesced in and benefited from LMC’s £30,000 advance to the Pexmans. 30.              Mr Simon Jones then wrote to Mr Ivan Jones on 4 May 1999 in terms which the judge held (paragraph 47) accurately recorded what was agreed in his discussion with Mr Sykes- “ ….LMC are now making a revised mortgage offer. We were invited to contact Mr Graham Sykes, the recoveries manager at John Smith’s Brewery [a subsidiary of S&N], who has indicated to the writer that the brewery are still willing to proceed with the transaction in general, on the basis of a payment now of £20,000 and second charges against Aitch’s Club, 287 Weelsby Street and the Pexmans’ home address at 109 Wellington Street, Grimsby.. As soon as we have a revised mortgage offer from LMC we will of course inform you. In the meantime, no doubt you will confirm matters with Mr Sykes. ”    31.              On 6 May 1999 Mr Ivan Jones, whom the judge found was instructed by Mr Graham Sykes,  replied stating that – “Our clients [S&N] may be prepared to release their charge upon payment of £20,000 with the balance of some £37,000 secured by second legal charges on the club and your client’s home address.”  32.              The balance owing to S&N was to be paid off by monthly instalments of £300 per month. 33.              The mortgage offer made in due course by LMC was of a loan of £30,000 to be secured by a first legal charge over the Club and the House. 34.              In subsequent correspondence between the solicitors leading up to the making of the £30,000 advance and the execution of the legal charges, the subject matter of the legal charges to LMC and S&N was usually referred to as covering the properties meaning both the Club, in respect of which LMC’s priority has been accepted by S&N, and the House. No distinction was drawn between the two properties.  35.              S&N did not call Mr Sykes, who was no longer in their employment, to give evidence at the trial to contradict Mr Simon Jones’s recollection of their telephone discussion in early May 1999. The judge accepted the evidence of Mr Simon Jones that he and Mr Sykes had agreed that the brewery’s charges would rank second to the charges in favour of LMC over both Club and House. Mr Marks accepted that LMC had an expectation that they would have a first charge on the House, but submitted that LMC’s expectation was only half the story and that the judge was wrong in accepting the evidence of Mr Simon Jones. He criticised the judge’s finding that the conversation between Mr Simon Jones and Mr Sykes had taken place. It was not evidence that LMC’s legal charge would have priority over S&N’s legal charge on the House.  36.              Mr Marks also pointed out that the draft legal charge prepared by Mr Ivan Jones and eventually executed by the Pexmans to secure the sum of £40,655.42 in favour of S&N, mentioned the council’s first legal charge, but not the legal charge in favour of LMC. The evidence of Mr Ivan Jones was that he understood the reference to S&N’s second charge in the correspondence to mean second to LMC in the case of the Club, but second to and taking effect only after the existing local authority charge in the case of the House, so that, after discharge of the charge in favour of the council, S&N’s charge on the House ranked as a first charge.     37.              The judge did not accept the evidence of Mr Ivan Jones that his understanding at the time of the advance by LMC was that the S&N was to be second only to the existing local authority charge over the House. The judge found that, as indicated in letters written to and by Mr Ivan Jones or copied to him, in particular a letter sent by Mr Esterkin to Mr Simon Jones dated 10 June 1999 copied to Mr Ivan Jones, his understanding at the time was, or must have been, that LMC was to have a first charge over the House, as well as the Club.   38.              LMC expected to get a first charge over the House and the Club to secure their advance of £30,000. S&N, who were to receive and did receive £20,000 out of the advance, knew, via Mr Sykes and Mr Ivan Jones,  that it was LMC’s expectation that S&N would rank behind LMC’s charge over the House and did not at that time assert the contrary to Mr Simon Jones. 39.              As for Mr Esterkin, he understood that it had been accepted by S&N, the Pexmens and Mr Simon Jones that LMC would have a first charge over the House and the Club. 40.              The judge referred to the post-completion letters passing between the solicitors for LMC and S&N in October and November 1999. They were consistent with S&N having clearly understood that both of their charges ranked second after both the charges in favour of LMC, that Mr Ivan Jones should have realised that LMC expected to be granted a first charge over both the House and the Club and that it was unlikely that LMC would advance its proposed loan on any other terms. 41.              If that was not acceptable to S&N, the whole transaction could have been called off. S&N would then have been left to their remedies as chargees of the Club alone and to personal remedies against Mr Pexman and could have obtained a charging order over his interest in the House, but they would have had no remedies against Mrs Pexman or the House. 42.              The judge found that the terms of a statutory demand dated 19 September 2000, which was settled by Mr Ivan Jones on behalf of S&N for service on Mr Pexman, was consistent with S&N’s knowledge, via Mr Sykes and Mr Ivan Jones, of LMC’s expectation on priority at the time of the legal charges. The demand stated that the brewery (S&N) held security on the House and the Club “..both properties being subject to a suspended Possession Order in favour of a prior mortgagee.”  This indicated that it was the understanding of Mr Ivan Jones that LMC had priority over both the House and the Club, which he had also acknowledged to be the case in his letter to Mr Esterkin on 23 June 2000. 43.              Although, as Mr Marks pointed out, these were post-completion documents, which could not by themselves prove S&N’s knowledge at the earlier date when the legal charges were granted, that does not prevent them from being evidence emanating from S&N, which is consistent with the pre-completion state of S&N’s state of knowledge of LMC’s belief and expectation.    Proprietary estoppel 44.              The leading authorities on proprietary estoppel relate to the expectation of creating or acquiring rights and interests in land. As explained in Snell’s Equity (31st) at p275 et seq elaborating on the formulation by Oliver J in Taylors Fashions Limited v. Liverpool Victoria Trustees Company Limited [1982] 1 QB 133 the doctrine covers a variety of circumstances, in which the courts will compel effect to be given to acquiescence by one party in the known expectation of the other party that he has or will have a proprietary right or interest where the other party has acted to his detriment on that basis. 45.              There is no single formula exhaustively identifying all the elements of proprietary estoppel or all the circumstances in which it is capable of applying.   In many cases the emphasis is on the constraining effect on the party who has  encouraged another party to act to his detriment in a mistaken expectation relating to property rights. In other cases there is acquiescence in standing by and not objecting to the conduct of the other party, while knowing of the belief or expectation in which the other party has acted. 46.              Mr Marks accepted the general principles summarised in Snell. He submitted that S&N had not, through either Mr Graham Sykes or Mr Simon Jones, who had no authority to act on behalf of S&N, made any representation or promise or encouraged a mistaken expectation or belief on the part of LMC that they would have priority for their legal charge over S&N’s legal charge on the House. No representation or promise had been made by or on behalf of S&N sufficient to support a plea of proprietary estoppel.   47.              This is, in my judgment, a case of passive acquiescence by S&N rather than positive representation, encouragement or promise. Mr Marks disputed the adequacy of the evidence to support a case on passive acquiescence. I am unable to agree with him on this point.   On the facts found by the judge S&N knew that LMC had an expectation of priority in relation to their charge over the House. The judge was entitled to find that, through Mr Sykes and Mr Ivan Jones, S&N knew of the expectation, yet stood by and allowed LMC to make the advance in that expectation, took benefit from it, but then later asserted their priority to counter the claims of LMC to the proceeds of sale of the House under a first charge. 48.              I would dismiss the appeal on the proprietary estoppel point. For reasons explained in the next section of the judgment, there is no contravention of the general principle that estoppel cannot be used to circumvent a statute. On this point the court received further written submissions from the parties after the hearing.        Section 2 Law of Property (Miscellaneous Provisions) Act 1989 (the 1989 Act) 49.              The judge rejected S&N’s point on lack of compliance with the formal requirements of section 2 of the 1989 Act, which provides that “(1) A contract for the sale of land or other disposition of an interest in land can only be made in writing …  …………   (5) ….and nothing in this section affects the creation or operation of resulting, implied or constructive trusts….” 50.              As a general rule, the courts will not allow a party to rely on an estoppel to contravene the requirements of a statute, but,  as Beldam LJ said in Yaxley v. Gotts [2000] Ch 162 at 191A, the application of this principle depends on the nature of the statute, the purpose of the particular provision and its social policy.  It is a general principle not an absolute rule. 51.               Mr Marks contended that the requirements of section 2(1) of the 1989 Act applied to this case. The transaction involved the “disposition of an interest in land,” which he submitted included the transfer of an interest occurring in this case as a result of an alteration in the priority of the legal charges on the House. As the disposition was not made in writing, it was invalid and could not be relied upon by LMC.  52.              In my judgment, the judge correctly rejected this submission. 53.              First, section 2 applies to contracts. Its aim is to render void contracts which do not comply with the prescribed formalities. In this case there was no contract between the parties for the sale of land or other disposition of an interest in land. No such contract was pleaded or proved. The case was pleaded and argued solely on estoppel. 54.              Secondly, the substantive effect of the proprietary estoppel was not the  disposition of an interest in the House, but a variation in the beneficial interests of the parties in the net proceeds of sale of the House. 55.              Thirdly, section 2(1) does not affect the creation or operation of a constructive trust. It has been held by this court that the doctrine of estoppel may operate to modify and counteract the effect of section 2(1); and that section 2(5) can cover cases of the equitable intervention of proprietary estoppel which coincide with or overlap the concept of a constructive trust, even though section 2(5) does not expressly refer to proprietary estoppel: Yaxley v. Gotts (cited above) at 174F, 176B-180F,181E-182D and 188D-193D (a case of a joint enterprise for the acquisition of land in which it would have been unconscionable for the other party to disregard the claimant’s rights.) 56.              The proprietary estoppel arising in this case from the acquiescence of S&N in the known belief and expectation of LMC about the priorities of the legal charges on the House coincides with or overlaps the concept of a constructive trust of the net proceeds of sale of the House available for the repayment of LMC and S&N. Whether the label attached to the situation is proprietary estoppel or constructive trust, the effect is the same: S&N is prevented from asserting a prior beneficial interest in the proceeds ahead of repayment of the sum due to LMC under their legal charge. The equity arising from proprietary estoppel can be satisfied by imposing a constructive trust on the proceeds of sale of the property subject to the competing charges. 57.              This characterisation of the estoppel should be reflected in the form of relief. In my judgment, the order for rectification of the register was not necessary or appropriate. The registration correctly reflected the priority of the legal charges in accordance with the Land Registration Act. The estoppel did not have the effect of making the order of registration of the legal charges wrong so as to justify rectification of the register, but an appropriate notice should be added to the register to reflect this order of the court. 58.              The correct position is that the effect of the proprietary estoppel has been to prevent S&N from asserting, on the division of the net proceeds of sale of the House, that they were entitled to be paid ahead of payment to LMC of the secured debt owed by the Club to them.   Estoppel by convention 59.              I have left estoppel by convention till last, as it is unnecessary to consider in detail the judge’s ruling in LMC’s favour or the rival submissions on this point. I will, however, say something on the point on which we have heard full argument. 60.               Mr Marks submitted that it was impossible to find in the evidence any communication between the parties sufficient to establish a shared or agreed understanding between LMC and S&N about the priority of their legal charges on the House.  There was no direct or written exchange emanating from Mr Ivan Jones and communicated to Mr Esterkin, even via Mr Simon Jones, which clearly stated that any charge taken by S&N over the House would rank after any first charge taken by LMC as distinct from the local authority’s charge. The conduct of Mr Ivan Jones was consistent with his belief that S&N would rank after the local authority charge on the House, which was the only charge referred to by him in the draft legal charge in favour of S&N. He was unaware of any understanding or agreement that S&N’s charge on the House would rank after LMC’s legal charge. As for the letter of 4 May 1999 from Mr Simon Jones, it was equivocal on the point, as was his reply of 6 May, since they did not specify which party or parties would have first charges on the properties. The judge was wrong to find any communicated understanding or assumption about priority of legal charges.       61.              As is clear from the leading authorities, such as Amalgamated Investments v. Texas Bank [1982] QB 84 at 121, 126 and 130 and The Indian Endurance [1998] AC 878 at 913, and the text books, such as Spencer Bower on Estoppel by Representation (4th edition) Chapter VIII, estoppel by convention may arise from an understanding or an assumption by the parties to a transaction as to a particular state of facts or law, in cases where the assumption is either shared by the parties or is made by one party and acquiesced in by the other. The estoppel precludes a party from denying the assumed facts or law which has been acted upon, if it would be unjust to allow him to go back on what was assumed to be the basis of the transaction. The parties are bound by the “conventional basis” on which they have conducted their dealings.  62.              This form of estoppel does not apply, however, to a representation or to a promise made by one party to the other as to future conduct, which is relied on and acted on by the other to his detriment. The essence of estoppel by convention is in the existence of a factual or legal state of affairs, the truth of which has been assumed or assented to by the parties and is shared by them as the basis of their relationship with each other. The truth of what has been assumed to be the case cannot be subsequently questioned by the parties bound by the convention. 63.              The principal difficulty in applying estoppel by convention to this case is  that the crucial question of the priority of legal charges related not to a shared assumption by the parties about an existing state of affairs, but to a future state of affairs, which would only come into existence once LMC made the advance and the legal charges had been executed. 64.              In these circumstance my provisional view is that this is not a case in which estoppel by convention was established.   Conclusion 65.              For the above reasons I would dismiss the appeal, but vary the judge’s order by deleting the order for rectification of the register and by making a declaration that, on the division of the net proceeds of sale of the House, LMC is entitled to be paid in full before any payments are made to S&N from the proceeds.   Lord Justice Sedley: 66.              I agree. Lord Justice Moore-Bick 67.              I also agree.