Land registration – Priority of legal charges – Respondent taking first legal charge over property – Second charge taken by appellant being registered before first charge – Whether appellant estopped from claiming priority for its charge – Whether charge in priority constituting disposition required to be in writing – Appeal dismissed
On 6 October 1999, P and his wife executed a legal charge on their jointly owned house in favour of the respondent mortgage corporation, which registered its charge on 17 November 1999. On 7 October, P executed a legal charge on the same property in favour of the appellant brewery, which applied to have its charge registered on 15 October, before the respondent had obtained the protection of a priority search.
When P fell into arrears with interest repayments, an issue arose as to which charge had priority. According to section 29 of the Land Registration Act 1925, priority was governed by the order of entry in the charges register, and not by the order of creation. The appellant’s legal charge on the house therefore had priority over that of the respondent.
However, the judge held that, by virtue of estoppel by convention or proprietary estoppel, the appellant was prevented from denying that its legal charge ranked behind that of the respondent. He made a declaration that the respondent’s charge ranked in priority over that of the appellant and ordered the rectification of the register by entry of an appropriate notice. The appellant was granted permission to appeal.
Before the Court of Appeal, the appellant sought to argue that the requirements of section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 applied. It contended that the transaction involved the disposition of an interest in land, which it maintained included the transfer of an interest that, in the instant case, had resulted from an alteration in the priority of the legal charges on the house. Since the disposition had not been made in writing, it was invalid and could not be relied upon by the respondent.
Held: The appeal was dismissed.
The doctrine of proprietary estoppel covered a variety of circumstances in which the courts would compel effect to be given to the acquiescence by one party in the known expectation of the other that it would have a proprietary right or interest if the other party had acted to its detriment. No single formula was capable of identifying all the elements of proprietary estoppel or when it could apply.
On the evidence, the present case was one of passive acquiescence by the appellant rather than positive representation, encouragement or promise. The appellant knew that the respondent had an expectation of priority. The judge was entitled to find that the appellant knew of the expectation, yet allowed the respondent to make the advance in that expectation, had benefited from it, but later asserted its priority to counter the respondent’s claims to the proceeds of sale of the house under a first charge: Taylor Fashions Ltd v Liverpool Victoria Friendly Society [1979] 2 EGLR 54; (1979) 251 EG 159 applied.
The general principle that estoppel could not be used to circumvent a statute had not been contravened. First, section 2 of the 1989 Act aimed to render void contracts that did not comply with the prescribed formalities, whereas this case had been pleaded and argued solely on estoppel. Second, the substantive effect of the proprietary estoppel was not a disposition but a variation in the beneficial interests in the net proceeds of sale. Third, section 2(1) did not affect the creation or operation of a constructive trust, but the doctrine of estoppel might operate to modify and counteract the effect of that section.
Had it been necessary to decide the point, the crucial question of the priority of legal charges related not to a shared assumption about an existing state of affairs but to a future state of affairs that would exist only once the respondent had made the advance and the legal charges had been executed. Accordingly, this was not a case in which estoppel by convention had been established.
In the present case, the proprietary estoppel coincided with or overlapped the concept of a constructive trust and the equity arising from proprietary estoppel could be satisfied by imposing a constructive trust on the proceeds of sale of the property subject to the competing charges. The appeal would be dismissed. However, but the judge’s order would be varied by deleting the order for rectification of the register and making a declaration that, on the division of proceeds of sale of the house, the respondent was entitled to be paid in full before any payments were made to the appellant.
David Marks (instructed by Halliwells LLP) appeared for the appellant; Thomas Putnam (instructed by Boote Edgar Esterkin, of Manchester) appeared for the respondent.
Eileen O’Grady, barrister
