Экзамен зачет учебный год 2023 / Dixon, Modern Land Law

Modern Land Law

2In disputes between a co-owner and a third-party secured creditor (e.g. a mortgagee), where there is no bankruptcy, it is important to assess why the creditor wishes a sale. It is worth noting here that a mortgagee does not have to resort to section 14 for a sale if the

mortgagee has overreached the beneficial interests by paying capital money to two or more trustees or otherwise takes free of the mortgage (e.g. having to obtain relevant consents). In such cases, like City of London Building Society v. Flegg (1988) where overreaching occurred and Le Foe v. Le Foe (2001) (consent), the mortgagee may sell in virtue of its paramount mortgage powers. Consequently, a mortgagee using section 14 of TOLATA 1996 is by definition a mortgagee bound as a matter of property law by the prior right of one of the co-owners. This may be important as the court legitimately can ask why it should deprive a co-owner of possession of the land when the co-owner’s right is paramount to that of the creditor. Thus, a creditor may not get an order for sale under section 14 where they simply have failed to protect themselves adequately (as in Boland). However, we must not think that this is a determining factor because there are cases where a sale has been ordered in favour of a non-priority creditor where the court determines that it is unjust to keep the creditor out of its funds. This is marked in those cases where the ‘unjustness’ is that the mortgagee believed that all the co-owners had consented to a mortgage but where this turned out to be untrue because of either fraud by one co-owner in forging the consent of the others (Bank of Ireland v. Bell (2001); Bankers Trust v. Namdar (1997)) or because there was a successful claim of undue influence in relation to the consent (First National Bank v. Achampong (2003)). Likewise, a sale might be ordered against the wishes of a beneficiary with priority where, on closer analysis,

a sale is actually in their best interests.77 In those cases where a sale is ordered at the request of a creditor who does not have priority, the equitable owner will have first call on the sale proceeds to the value of her interest and the creditor will be left to take its funds from the balance of the proceeds of sale.78 The priority is thus reflected in priority over the proceeds of sale. Of course, the court may well conclude that no sale should be ordered, at least not without terms and conditions to protect the innocent co-owners

77Pritchard Englefield v. Steinberg, where if there were no sale, the landlord was likely to forfeit the equitable owner’s lease, leaving her with nothing.

78If there is a shortfall, it might then pursue the mortgagor personally for the outstanding balance.

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(Mortgage Corp v. Shaire (2001)) or where there is a greater need to protect the innocent co-owner and any occupying children (Edwards v. TSB (2004)).

3Where one of the co-owners goes bankrupt and his trustee in bankruptcy applies for an order for sale (within the allotted three years), it will take exceptional circumstances for a sale to be postponed for more than a year. Such a postponement has been rare indeed, but Barca v. Mears suggests that the need to comply with the Human Rights Act might force a rethink. This has been sidestepped in Donohoe v. Ingram and flatly contradicted by Nicholls v. Lan.

4It is open to a mortgagee who cannot otherwise obtain a sale under section 14, to make the mortgagor bankrupt. The mortgagor owes a debt that he cannot pay. This will mean the mortgagee giving up its secured status – and becoming an ‘ordinary’ creditor losing its proprietary right over the property79 – but it means that the insolvent co-owner’s property passes to the trustee in bankruptcy. This trustee can then apply for a sale under section 14 of TOLATA 1966 and this is likely to be ordered under the more powerful bankruptcy rules. Although this appears to be allowing the mortgagee to get by the back door what it cannot get by the

front – after all, the mortgagee itself could not get a sale under section 14 otherwise it would not resort to this tactic – it is not an abuse of the process and will not be prevented by the court, as made clear in Alliance & Leicester v. Slayford (2001). Of course, as a practical matter, the mortgagee must be reasonably certain of getting some money as an unsecured creditor in bankruptcy before giving up its protected status as a secured creditor.

4.9.5The position of a purchaser who buys co-owned land: when overreaching occurs

If a purchaser buys co-owned land from two or more legal owners (i.e. there are two or more trustees of land), then the interests of the equitable owners are overreached. The effect is that their co-ownership interest is transferred from the land and takes effect in the proceeds of sale. The purchaser obtains the land free from their rights, as in City of London Building Society v. Flegg (1988) where the House of Lords confirmed that a mortgage (i.e. a sale) by the two trustees overreached the interests of Mr and Mrs Flegg so as to give the mortgagee a prior right to possession when the trustees

79 Section 269 of the Insolvency Act 1986.

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defaulted on the mortgage payments.80 This is the same in registered and unregistered land.

Usually, at least in a residential context, the two trustees will be the couple who together own the home in its entirety, both also being the only equitable owners. In such cases, the power of overreaching causes no difficulty because any ‘equitable owner’ can object to a proposed sale or mortgage in his or her capacity as a ‘legal owner’. However, in some cases, the equitable owners will be different from the legal owners – such as in Flegg itself – and if there are two trustees, overreaching will occur. In that situation, the purchaser obtains the land free from the equitable rights, and those equitable rights take effect in the proceeds of sale, even if the equitable owners objected to the sale or knew nothing about it and, in fact, actually get nothing from the proceeds of sale,81 as in Flegg. In other words, overreaching can occur against the wishes of the equitable owners and they could lose their right to occupy the land and must take their ‘interests’ in the proceeds of sale.82 This result is not affected by section 11 of TOLATA 1996 whereby the trustees must consult the equitable owners and ‘in so far as is consistent with the general interest of the trust’ give effect to such wishes. This is because section 11 imposes a duty to consult and pay attention to such wishes, not a duty to follow them slavishly, and overreaching will occur even if the trustees have not consulted at all, although in such cases the trustees may be liable personally for breach of trust.

Not surprisingly, the powerful effect of overreaching has caused some concern for it appears to deprive an equitable owner of their interest in land and substitute instead a monetary claim on the trustee that may in reality be illusory. Indeed, the Law Commission once proposed different ways of combating overreaching and protecting the equitable owner. These proposals – now defunct – are briefly considered below. However, for the moment, let us consider the impact, if any, of other provisions of TOLATA 199683 on the effectiveness of overreaching. As we have seen, it is now possible for a settlor (i.e. the person who sets up the trust of co-owned land) to provide that the exercise of the trustees’ powers should be subject to the consent of the

80The Fleggs were the parents of one of the trustees (Mrs Maxwell-Brown), had contributed to the purchase price and thus were co-owners in equity, were in actual occupation at the time of the mortgage and knew nothing of it. It was their only home. See also Birmingham Midshires Building Society v. Saberhawal (2000).

81For example where the mortgage monies have been spent by the trustees, perhaps on the house or on a business venture or just dissipated.

82Note also that overreaching can occur even if no capital money is actually paid over, provided that it was payable on the sale, as where a mortgage is used to secure a fluctuating overdraft (State Bank of India v. Sood (1997) and see Chapter 2).

83Section 11 – the duty to consult – is discussed immediately above.

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beneficiaries (section 10 of TOLATA 1996) and further that any interested person (e.g. a non-legal equitable owner) may make an application for an order ‘relating to the exercise by the trustees of any of their functions’ (section 14). How do these provisions affect the ‘trump card’ of overreaching when there are two or more trustees of the land?

4.9.6 If consents are required

If the disposition originally conveying the land to the co-owners makes the trustees’ powers (e.g. of sale or mortgage) dependent on obtaining the prior consent of the equitable owners (as envisaged by section 10 of TOLATA 1996), there is a potential conflict with the ability of the trustees to sell the land and overreach the equitable interests. For example, what is the position if the land is sold by the two trustees, but the required consents are not obtained? Is the purchaser bound by the equitable interests, or are they overreached? This is not such an easy question to answer, as the Act is not entirely clear on this point. Although it will be rare for consent requirements to be built into a trust of residential property (because the trustees/equitable owners will usually be the same people), the matter will not be settled conclusively until there has been some case law. Moreover, it should also be remembered that trustees could apply under section 14 of TOLATA 1996 for the removal of a consent requirement in the same way that equitable owners can apply for one to be imposed.

With these qualifications in mind, TOLATA 1996 appears to envisage the following results if land is sold or mortgaged by two or more trustees of land by a proper overreaching transaction yet in violation of a consent requirement. In registered land, because the consent requirement is expressed in the ‘disposition’ establishing the trust (i.e. it will be written in the original conveyance to the two trustees – section 10), the consent requirement is likely to be entered on the register of title in the form of a restriction against dealings.84 This means that no dealings with the land can occur until the conditions of the restriction have been complied with – that is, consent is obtained. If, by some unlikely chance, no restriction is entered, the better view is that the purchaser obtains a good title to land, the equitable interests are overreached, and the equitable owners are left to sue the trustees for breach of trust.85 This is despite section 8 of TOLATA 1996, which says that the power of sale ‘may not be exercised without that consent’. Although there has been some academic criticism of this view, there is no doubt that TOLATA 1996 was not

84A Form N restriction.

85Sections 29 and 30 of the LRA 2002.

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intended to restrict the power of overreaching. Case law under the Land Registration Act 1925 supported this view,86 and sections 26, 29 and 30 of Land Registration Act 2002 settle any doubts in favour of the primacy of overreaching in these circumstances. They stipulate in effect that overreaching is effective save where some restriction is entered on the title, even if a sale by the trustees violates some term of the trust. Note finally that a consent requirement granted by reason of an order of the court following an application made under section 14 of TOLATA 1996 will, of necessity, be registered as a restriction consequent on the court order.87

In unregistered land, although any deliberate consent requirement will again be expressly declared in the disposition establishing the trust, there is no mechanism to register it under the Land Charges Act (LCA) 1972. It would not be a land charge within classes A–F, nor does a consent requirement appear to fall within any of the other registers of the LCA 1972. However, section 16 of TOLATA 1996 (which applies only to unregistered land) says that a purchaser is not affected by the trustees’ failure to observe a consent requirement included in a disposition provided that the purchaser had no actual knowledge of the consent requirement. In other words, if the purchaser (or his legal adviser) did not actually know that the land was being conveyed in breach of a consent requirement, then overreaching remains effective. By analogy, the same rule should apply if a consent requirement is imposed as a result of an application under section 14 of TOLATA 1996 (although the Act does not address this possibility). This means that the position in registered and unregistered land is broadly similar in effect. Note, however, that the chances of a consent being required in unregistered land are minimal – new trusts will usually take effect in registered land and rare will be the circumstances when a consent requirement is imposed on an existing trust in unregistered land.

4.9.7 If consents are not initially required

If no consents are required, then clearly the matter is straightforward – overreaching takes its usual course. However, we need to be aware of the possibility that an equitable owner may apply under section 14 of TOLATA 1996 for a court order that the trustees seek his or her consent before a sale or mortgage. This is not precluded by section 14 which says that the court may make any order ‘relating to the exercise by the trustees of any of their functions’. It is, however, controversial, for in Coleman v. Bryant the court was not prepared

86Birmingham Midshires Building Society v. Saberhawal (2000).

87Note, however, that it now seems unlikely that a court will impose such a requirement, unless the circumstances are exceptional (Coleman v. Bryant (2007)).

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to enter a restriction requiring the consent of the equitable owner before a sale because this would destroy the concept of overreaching. It remains to be seen whether the court will have to develop criteria to determine whether a consent requirement should be imposed, but if such an order is made, the position is as that described immediately above.88

4.9.8 When overreaching does not occur

Sections 2(1)(ii) and 27 of the LPA 1925 require money to be paid to at least two trustees89 in order to overreach the equitable interests behind a trust of land. Consequently, the usual reason why overreaching does not occur is that there is only one trustee of the property, as in Williams and Glyn’s Bank v. Boland

(1981) where Mr Boland was sole trustee holding for himself and his wife in equity. This situation arises most commonly because of a successful claim to an equitable interest in the property by a non-legal owner utilising the rules of resulting or constructive trusts discussed below.90 A typical example would be where a single woman buys a house (which is conveyed to her name alone) and then she invites her lover to live with her, and the lover acquires an equitable interest under the principles explained in Pettitt v. Pettitt (1970) and Lloyds Bank v. Rosset (1991). If that happens, a trust of land arises,91 but there is only one legal owner. If the purchaser buys the property (or a bank lends money on it), but pays the purchase money to the single trustee only, then the purchaser cannot rely on overreaching to protect him from the rights of the equitable owners. The purchaser may be bound by the rights of the equitable owners and his use of the land severely restricted or completely disrupted. In fact, in the absence of overreaching, the normal rules of registered or unregistered land (as the case may be) take over. Thus, in registered land, if the equitable owner is a person in discoverable actual occupation of the property at the time of the purchase or mortgage92 he will have an interest which overrides the interest of the purchaser or mortgagee under paragraph 2, Schedule 3 of the LRA 2002. However, if this is not the situation – that is, the equitable owner is not in discoverable occupation triggering an interest which overrides – the purchaser or mortgagee will take the land free of the equitable interests even if they are not overreached

88Note, however, that section 8 of TOLATA 1996 talks only of a consent requirement imposed by the disposition creating the trust. It could be that consent requirements imposed under section 14 will be treated differently.

89Or a trust corporation.

90Pettitt v. Pettitt (1970) and Lloyds Bank v. Rosset (1991).

91Bull v. Bull (1955).

92Abbey National Building Society v. Cann (1991).

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because this is the normal rule in registered conveyancing (sections 29 and 30 of the LRA 2002).93

In unregistered land, these equitable interests cannot be registered as land charges (see section 2(4) of the LCA 1972). Consequently, whether they bind a purchaser or mortgagee who has not overreached depends on the ‘doctrine of notice’, this being one of the very few scenarios where this ancient doctrine is still relevant in modern land law. Usually, if the equitable owner is residing in the property, the purchaser or mortgagee will be deemed to have constructive notice of their interest, and be bound by it, as discussed in

Kingsnorth Trust v. Tizard (1986).

However, in both registered and unregistered land, a purchaser who has failed to overreach, and who is apparently bound by the priority of the equitable interest, nevertheless may be able to plead that the equitable owner has expressly or impliedly consented to the sale or mortgage. In such cases, a court of equity will respect the express or implied consent of the equitable owner with the consequence that the purchaser gains priority over their interest.94 In order to give the purchaser this relief, the court must be satisfied that the expressed or implied consent is real. Thus, consent does not exist simply because the equitable owner has knowledge of the proposed sale or mortgage – Skipton Building Society v. Clayton (1993) – but rather this knowledge must be combined with circumstances that indicate an acceptance of the priority of the purchaser or mortgagee. Some examples may help to clarify the situation.

First, if the legal owner attempts to mortgage the land to a bank and his lover (the equitable owner) signs a consent form postponing her interest to that of the bank, we can be sure that (in the absence of undue influence) the consent was real for it has been given expressly. The obtaining of such express consent is the safest course of action for a mortgagee dealing with a single legal owner when it suspects that the other person on the land has some equitable interest in it. Second, even in the absence of a signature on a consent form, the equitable owner may have so acted in relation to the mortgage (e.g. attending the bank, explaining the need for a mortgage to the bank’s employee) that her consent can be implied from her actions. In such cases, the participation of the equitable owner in securing the mortgage undoubtedly implies consent. Third, if the equitable owner is aware that a mortgage is the only way in which the land can be purchased, he or she must

93Note such equitable interests cannot be protected by the entry of a Notice against the title: section 33 of the LRA 2002.

94Paddington Building Society v. Mendelson (1985), registered land; Bristol and West Building Society v. Henning (1985), unregistered land.

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be deemed to have consented to that mortgage. Without the mortgage, there can be no property in which the equitable owner can have an interest and so the equitable owner cannot deny the priority of the mortgage. Importantly, this effectively means that it is near impossible for an equitable owner to claim priority over a mortgagee who provides funds for the original purchase of the land – consent will always be deemed to have been given by reason of the necessity of using a mortgage.95 Fourth, it is established that genuine consent to one mortgage (mortgage X) will be taken to be effective in favour of a new mortgagee (mortgage Y), if the second mortgagee is providing funds to pay off the first mortgage. This is more properly regarded as a species of subrogation96 than ‘transferred consent’ but it is based on the policy that the equitable owner should not benefit (i.e. recover her priority) merely because of a change in the identity of the lender. Consent to one mortgage can be taken to be consent to its replacement.97 Fifth, by way of contrast, an equitable owner who knows that the legal owner is about to mortgage, but who does not consent expressly or impliedly, does not thereby lose the priority of his or her interest – assuming it amounts to an overriding interest under LRA 2002 through (discoverable) actual occupation. It is up to the lender to ensure that it has priority by seeking consent, it is not for the equitable owner to offer it. In practice, of course, most lenders will ensure that all possible or potential equitable owners sign a consent form before the lender agrees to advance the money by way of mortgage, thus securing the priority that may not be available through overreaching.

4.9.9The position of the equitable owners: problems and proposals

We have noted above that if a purchaser pays the purchase price to two trustees of the property, the equitable owners’ rights are overreached. This means that the equitable rights are automatically transferred to the proceeds of sale – if any

– and the trustees hold that money on trust for the equitable owners in the same way as they held the land; that is, as tenants in common or joint tenants. In many cases, of course, the sale will be caused by one or all of the co-owners

95Abbey National B.S, v. Cann. It might be otherwise if the equitable owner’s interest existed in unmortgaged land that was sold to purchase the new land and the equitable owner knew nothing of the need for a mortgage.

96Generally, where a person (mortgagee Y) discharges an obligation (e.g. a mortgage) owed by person (the borrower) to another (mortgagee X), Y can be subrogated to the ‘obligation’ and be entitled to enforce the mortgage against the borrower. The person discharging the debt effectively steps into the shoes of the former mortgagee.

97This consent is effective up to the value of the mortgage that is paid off by the replacement mortgage (Equity and Home Loans v. Prestige (1992); LeFoe v. LeFoe (2001)).

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wishing to realise their investment and it is quite likely that the money will be distributed and the trust brought to an end. Alternatively, where the legal and equitable owners are the same people (e.g. husband and wife), the money may be used to finance the purchase of a new property that could then become co-owned in the same way as the one sold. These are, indeed, the ‘normal’ cases and the great majority of dealings with residential co-owned land follow this smooth path. Yet there will always be some legal owners who decide to sell without telling the equitable owners, perhaps in order to abscond with the proceeds, or more frequently those who wish to raise a loan by way of mortgage of the property for their own purposes. What happens then?

The first question is always whether overreaching has occurred and, if not, whether the purchaser or mortgagee is bound by the equitable interests. If overreaching has not occurred and the mortgagee/purchaser is bound, from the point of view of the equitable owners, the problem may have gone away. The equitable owners remain in possession of the land, save only that a mortgagee could apply for an order under section 14 of TOLATA 1996 forcing a sale of the land in order to realise its security. Whether the court would order a sale in such circumstances has been discussed above.98 If overreaching has occurred, the fundamental rule is that the equitable owners have no claim against the purchaser or mortgagee to remain in possession of the land (City of London Building Society v. Flegg (1988)). They are overreached and their interests now take effect in the proceeds of sale or mortgage money. If the legal owners have absconded or are unable to pay, the equitable owners will have the normal remedies for breach of trust; for example, a personal action against the trustees or a tracing claim to any assets obtained by use of the trust money. Unfortunately, all this may be of little comfort to an equitable owner who did not want to have the land sold, especially as their share of the proceeds may not be sufficient to pay for alternative accommodation. This is particularly acute in cases where the property has been used as a family home. Likewise, the rationale for overreaching disappears completely if no purchase money was actually paid on the transaction, as in Bank of India v. Sood.

In response to the decision in Flegg, and as a way of limiting the effect of overreaching for an ‘unwilling equitable owner’, the Law Commission once suggested three alternative reforms to the law (Law Commission Report No. 188). They are discussed briefly below, but are now defunct:99

1That overreaching should not be possible unless one of the trustees is a solicitor or licensed conveyancer. The idea was simply that such

98Paragraph 4.9.

99It has been accepted that, in fact, Flegg was an unusual case and that the need to ensure the alienability of co-owed land has priority over a policy of protecting occupiers.

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a person might offer protection to an equitable owner by looking after their interests and possibly objecting to a sale. However, this was a poor solution, as it would have made conveyancing more expensive as well as requiring an ‘outsider’ to become involved in personal affairs. Moreover, would it have worked? Would a solicitor have the time or inclination to be the guardian of the equitable owner?

2That overreaching should not be possible if the equitable owner had registered their equitable interest. This is superficially attractive as the register could have been relied on by the purchaser to indicate whether it was safe to proceed and the equitable owner would have been protected. Unfortunately, however, this ‘solution’ presupposed that equitable owners would have been prepared to register, even if they had known they should.100 It is no accident that where there is no overreaching, these equitable rights are capable of binding the purchaser without the need for registration through their potential as overriding interests.

3That overreaching should not be possible without the consent of all the equitable owners who are of full age and in possession of the property. The first point is that this would certainly have worked. An equitable owner’s right to the land would have been safe from overreaching under this proposal. However, what this also would have done is to have destroyed the entire overreaching mechanism of the LPA 1925. The whole point behind the abolition of legal tenancies in common, the institution of the joint tenant trusteeship and the concept of overreaching is precisely that a purchaser should be able to buy co-owned land without having to search for every legal and equitable owner and obtain their consent. This proposal would have returned the law to its pre-1926 state law. In fact, it would have been much easier to have reinstated legal tenancies in common if that is what was wanted. That said, it will be obvious from the above discussion of the effect of TOLATA 1996 that some form of ‘consent requirement’ may now exist – the parties have thought carefully about their rights and responsibilities. This may not actually prevent a sale by two trustees (see section 4.9.6),

but it could trigger an application under section 14 of the Act.

100For example, given that many of these equitable interests arise informally without writing or the involvement of solicitors, would a claimant know to register his or her interest ‘against’ her lover’s land? Would she have been prepared to register, especially as this might have been regarded as a hostile act?

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