Trusts of Land and Appointment of Trustees Act 1996 — Mortgage — Charge of beneficial interest — Application for orders of possession and sale — Whether principles under section 30 of the Law of Property Act 1925 relevant — Whether orders should be made
In 1979 the
second and third defendants acquired the freehold of the subject property as
joint tenants under a trust for sale; the object of the trust was to provide a
home. Following a divorce and the making of a court order in 1984 dealing with
the property, the third defendant executed an assignment of his beneficial
interest to the second defendant. The second defendant then married the first
defendant and by a deed of gift and conveyance purported to convey the property
to herself and the first defendant. After earlier charges, the first and second
defendants then charged the legal estate to the plaintiff bank. Following the
dissolution of the first and second defendants’ marriage in 1996, an order was
made purporting to transfer back to the second defendant the first defendant’s
legal and beneficial interests in the property. It was agreed that because the
1984 assignment failed to deal with the legal estate, the third defendant
remained a joint tenant of the legal estate and the charge to the bank did not
create a legal mortgage in its favour; all it did was create an equitable
charge over the beneficial estates of the first and second defendants. As a
result of the 1996 court order, the first defendant’s equitable interest was
transferred to the second defendant, subject to the mortgage to the bank.
Following arrears of repayments, the bank sought orders for possession and sale
under sections 14 and 15 of the Trusts of Land and Appointment of Trustees Act
1996.
out of the decided authorities under section 30 of the Law of Property Act
1925. (1) The purpose of section 30 was to enable the court as a matter of
discretion to do what was equitable, fair and just; that was also the position
under section 14 of the 1996 Act. (2) Where there is a conflict between a
chargee’s interest in a matrimonial home and the interests of an innocent
spouse, the interest of the chargee will prevail except where there are
exceptional circumstances. (3) Where there is a collateral purpose of a trust
still subsisting, the court should not defeat that purpose by ordering a sale.
The intention of the 1984 order was to provide a home for the second defendant
and her children until they were of full age. Section 15(1)(c) of the 1996 Act
confines consideration of the welfare of any children to minors. The second
defendant no longer had minor children. There were no exceptional circumstances
that should prevent the orders sought by the bank being made.
The following
cases are referred to in this report.
Abbey
National plc v Moss (1993) 26 HLR 249;
[1994] 1 FLR 307, CA
Barclays
Bank plc v Hendricks [1996] 1 FLR 258
Lloyds
Bank plc v Byrne & Byrne (1991) 23 HLR
472; [1993] 1 FLR 369, CA
This was an application
by the plaintiff, TSB Bank plc, for orders of possession and sale under the
Trusts of Land and Appointment of Trustees Act 1996 against the defendants,
Stephen Marshall, Joanne Marie Marshall (known as Joanne Marie Rodgers) and
Lionel Reuben Rodgers.
David Pope
(instructed by Adams & Remers, of Lewes) appeared for the plaintiff; James
Behrens (instructed by AJ Careless & Co, of Ventnor) appeared for the
second defendant; the first and third defendants did not appear and were not
represented.
Giving
judgment, JUDGE WROATH said: In this case the
plaintiff applies to the court for an order for sale in respect of a property,
‘Sylvan Seas’, Hunts Road, St Lawrence, Isle of Wight (the property). I shall
hereafter refer to the plaintiff as the bank. The first defendant, Mr Marshall,
has not taken any part in the case and has not appeared at the final hearing.
The case is actively defended by the second defendant, Mrs Marshall (now known
as Mrs Rodgers), and by the third defendant, Mr Rodgers.
In 1979 the second
and third defendants were married with young children. They purchased the
property from a Mr and Mrs Marriott on October 5 1979 on trust for sale for
themselves as joint tenants. It is accepted that the object of the trust was to
provide a home for the second and third defendants and their children. The
property was charged to a building society and later to a bank also, but those
charges have long since been redeemed.
In 1983 the
marriage between the second and third defendants broke down and was dissolved
by a divorce in this court. The financial aspects of the divorce were resolved
by an order of the court dated February 29 1984. This order is central to the
case and I shall hereafter refer to it as ‘the order’.
As far as the
property is concerned, the order vested the whole of the beneficial interest in
the second defendant, but left the legal estate in the joint names of the
second and third defendants. Therefore, any future dispositions of the legal
estate had to be executed by both the second and third defendants.
In compliance
with the order, the third defendant, on August 13 1984, executed an assignment
of his beneficial interest to the second defendant.
On July 1 1989
the second defendant married the first defendant. On January 23 1990 the second
defendant executed a deed of gift in favour of the first defendant. In that
document she was referred to as the donor and the first defendant as the
beneficiary. At recital 1.2, reference was made to the assignment of August 13
1984 in these words:
the said
Lionel Reuben Rodgers assigned to the Donor all his beneficial interest in the
said property to the intent that the whole of the property should vest in the
Donor absolutely.
That wording
was misleading in that it appeared to say that the second defendant was the
sole owner of the property. However, the fatal mistake in this document was
perpetrated at clause 2. That reads:
The Donor
conveys the property to the Donor and the Beneficiary to hold to the Donor and
the Beneficiary in fee simple on trust for sale with power to postpone the sale
and to hold the net proceeds of sale and the net income until sale as
beneficial tenants in common as to 88.57% to the Donor and as to 11.43% to the
Beneficiary.
That purported
to deal with the legal estate as well as the beneficial interest. The second
defendant could not do that, and the deed of gift was invalid as to the legal
estate. That remained in the joint names of the second and third defendants.
The first and second defendants then purported to charge the legal estate in
the property to Portsmouth Building Society (now Cheltenham & Gloucester
Building Society) and on February 26 1993 to the bank. The charge to Cheltenham
& Gloucester Building Society has since been redeemed, leaving the
purported charge to the bank. The solicitors acting for the building society
and those for the bank both failed to recognise the error in the deed of gift
and accepted that the first and second defendants had title to the legal
estate.
The marriage
of the first and second defendants broke down and was dissolved in this court
by a decree absolute, and the financial aspects of that divorce were dealt with
by an order of the court dated March 27 1996. That order purported to transfer
back to the second defendant the first defendant’s legal and beneficial
interests in the property. In fact, the first defendant had no legal estate, so
it only transferred his beneficial interest back to the second defendant.
It is now
common ground between the parties that the charge to the bank did not create a
legal mortgage in favour of the bank. All that it did was to create an
equitable charge over the beneficial estates of the first and second
defendants. As a result of the court order of March 27 1996, the first
defendant’s equitable estate was transferred to the second defendant, subject
to the mortgage to the bank. So as at today, the bank has an equitable charge
over the whole beneficial estate in the property. However, being only an
equitable charge, the remedies available to the bank are restricted where, as
in this case, there is default in payment.
The loan to
the first and second defendants by the bank was a total of £67,800. No payments
have been made since October 1996 and the arrears are now approximately
£15,000. The total debt is £83,923.35, and by consent I have entered judgment
in favour of the bank for that amount.
The bank now
seeks an order for sale and possession of the property in order to realise its
security. Because it only has an equitable charge over the property, it is
obliged to apply to the court for an order for sale under the Trusts of Land
and Appointment of Trustees Act 1996.
The relevant
sections of the Act are 14 and 15. Section 14 provides that any person who has
an interest in any property may apply to the court for an order. It is common
ground that the bank is a person with an interest in the property in this case
and is entitled to apply, as it does, for an order for sale.
Section 15
starts with these words:
(1) The
matters to which the court is to have regard in determining an application for
an order under section 14 include —
(a) the
intentions of the person or persons (if any) who created the trust,
(b) the
purposes for which the property subject to the trust is held,
(c) the
welfare of any minor who occupies or might reasonably be expected to occupy any
land subject to the trust as his home, and
(d) the
interests of any secured creditor of any beneficiary.
It is
important to note that the word include means that the four matters set
out in the section are not the only considerations to which the court must have
regard, and any other relevant matters should be taken into account.
I have been
directed to three cases: Lloyds Bank plc v Byrne & Byrne
[1993] 1 FLR 369; Abbey National plc v Moss [1994] 1 FLR 307; and
Barclays Bank plc v Hendricks [1996] 1 FLR 258.
Those three
cases were all decided where the applications to the court were under section
30 of the Law of Property Act. However, it has been submitted that the
principles established are applicable to an application under section 14, and I
accept that submission.
In my
judgment, there are three principles that come out of those cases.
First, that
the purpose of section 30 of the Law of Property Act was to enable the court as
a matter of discretion to do what was equitable, fair and just. I am satisfied
that that must also be the position under section 14, which was enacted to meet
the same situations that were dealt with under section 30. It is settled law
that in exercising a discretion the court must have regard to all the
circumstances of the case, and any prejudice which a party may suffer, and to
exercise the discretion judicially.
The second
principle is that where there is a conflict between a chargee’s interest in a
matrimonial home and the interests of an innocent spouse, the interest of the
chargee will prevail except where there are exceptional circumstances.
As to that, it
must be noted that the second defendant is not an innocent spouse. She, with
the first defendant, was the person who created the charge to the bank and with
him received the loan. At the time it was created it was intended to be
security for the advance made and she must have realised that if there was default
in payments then the security would be invoked. That being so, she is in a very
different position to the innocent defendants in the three cases I have cited.
Strictly
speaking, as to the legal estate, the third defendant could claim to be an
innocent spouse in that he did not execute the charge to the bank and did not
receive any benefit from it. However, he does not have any beneficial interest
in the property and does not live in it. Therefore, he personally would not be
adversely effected by an order. So he is in a very different position to the
defendants in the cases cited.
In this case
neither the second nor third defendant seeks to say that there are exceptional
circumstances.
The third
principle that comes out of the three cases is that, where there is a
collateral purpose of the trust still subsisting, the court should not defeat
that purpose by ordering a sale. Both the second and third defendants rely on
this ground. It is their case that there is a continuing collateral purpose to
the trust in that it is still intended as a home for the children of the
family.
To determine
the question of a collateral purpose, it is necessary to consider the order of
the court following the divorce of the second and third defendants. I do not
propose to set the order out in full, but, stated shortly, it transferred the
beneficial interest in the matrimonial home to the second defendant and
provided for her to have nominal periodical payments for herself and £46 per
month for each child until 17. The legal estate remained vested in both
spouses. There could be no sale of the property without the consent of the
second defendant or a further order of the court. In fact, because the legal
estate was still in the names of the second and third defendants, both had to agree
or there could be no sale unless the court overrode both their consents. That
is still the position today.
The second and
third defendants’ case is that the intention of the order was to provide a home
for the children. They argue that that is a collateral purpose which continues,
notwithstanding that all the children are now of full age, as long as any of
them continue to live there and remain in full-time education. Currently two
are living in the home, and the youngest one, Ethan, aged 18, is in full-time
vocational training.
The first
point that the bank makes is that, as the trust was created by the court order,
the intentions of the second and third defendants are irrelevant. On the face
of it, the order was not a consent order, but equally there was not a contested
hearing. The reality must be that the terms of the order were basically agreed,
even though the order is not expressed as being a consent order. In those
circumstances, in my judgment, it is appropriate to consider whether there was in
fact a collateral purpose contemplated by the parties or the court.
I have no
difficulty in accepting that the intention of the order was to provide a home
for the mother and the children until they were of full age. That has been the
basic approach of the courts in matrimonial orders for a very long time.
However, that has always been until the children are of full age. There has
been no authority cited to me that supports the proposition that, in the
absence of express words, the intention goes beyond the child coming of age. In
that regard it is important to note that section 15(1)(c) specifically confines
consideration of the welfare of any children to minors.
In my
judgment, an intention that the order was to apply to adult children would have
to be expressed in clear terms in the order. In the absence of any such clear
expression of intent, I am satisfied that I cannot imply it unless there is
strong evidence to support it. There is nothing in the evidence in this case
that persuades me that these two defendants or the court had any such intention
in mind.
For all the
above reasons I am satisfied that there is no collateral purpose in this case,
and the fact that one or more of the adult children continue to live in the
house is not a consideration I must have regard to in deciding whether there
should be an order for sale.
There is one
final argument put forward by the second and third defendants. They argue that,
as the solicitors for the bank were at fault in accepting the purported title
of the first and second defendants to the legal estate and they could not
charge the legal estate, the bank should not now be allowed to rely upon their
security. Counsel for the second defendant expressed it in these words: ‘this
mortgage should not have been granted’.
The third
defendant expressed it in these words: ‘It would seem that even though the
initial error was made by the plaintiff (bank) and/or their agents, they are
seeking retribution from Mrs Rodgers rather than those who made the error in
the first place’.
In my
judgment, that point is entirely without merit. As I have already observed,
whatever the legal position as to the title, the first and second defendants
borrowed the money, had the benefit of it and put up the property as security.
They were both of full age and sound mind and knew that they were pledging the
property against the loan.
The bank has
an equitable charge over the property, there has been serious default in
repayments and there are now substantial arrears owing. To suggest that the
second defendant can avoid the consequences of her default and hide behind a
conveyancing error to avoid the security being enforced is wrong and would be a
gross injustice to the bank.
Furthermore,
the fact that the second defendant now has third party proceedings against her
own solicitors in respect of the conveyancing error does not change the
position between her and the bank.
The second
defendant is in a difficult financial position and her current income will drop
within a couple of months. She has failed to
the foreseeable future. The third defendant makes no financial proposals to
assist the second defendant. So we have the position that there is a
substantial debt, which has no realistic possibility of being paid and is
increasing daily. The only way that the bank can recover the moneys owing to it
is to sell the property.
Having regard
to all the circumstances of this case, the law that applies and there being no
exceptional circumstances, I am satisfied that there must now be an order for
sale and for possession.
