A conveyance by two trustees is capable of overreaching extraneous equitable interests, in addition to those arising under the trust itself
Struggling homeowners who seized on sale-and-leaseback agreements to escape from debt, having sold their properties at a discount in return for the right to stay on as tenants, have not fared well in subsequent litigation against the lenders who funded the transactions. Mortgage Express v Lambert [2016] EWCA Civ 555; [2016] PLSCS 173 is the latest in a long line of such cases. The court’s ruling casts new light on the effect of section 2 of the Law of Property Act 1925, which many could seek to exploit.
The case concerned a flat owner who was in desperate financial straits. As a result, she sold her leasehold interest to two buy-to-let investors for £30,000, even though her solicitors suggested that her property was worth considerably more. The investors funded the purchase via a bridging loan, which was succeeded almost immediately by a legal charge in favour of a third party. Neither lender knew that the seller expected to remain in situ as a tenant and her replies to enquiries and requisitions did not disclose that she had any claim on the property.
It was not long before the investors’ mortgagee took steps to evict the seller because the mortgage was in arrears, as was the rent. In the litigation that followed, the trial judge ruled that the sale should be set aside on the ground that it was an unconscionable bargain. The seller had been desperate, vulnerable, naïve and lacking in any business acumen or sense, and the buyer had taken unfair advantage of her by making her an offer that he knew to be dishonest.
Struggling homeowners who seized on sale-and-leaseback agreements to escape from debt, having sold their properties at a discount in return for the right to stay on as tenants, have not fared well in subsequent litigation against the lenders who funded the transactions. Mortgage Express v Lambert [2016] EWCA Civ 555; [2016] PLSCS 173 is the latest in a long line of such cases. The court’s ruling casts new light on the effect of section 2 of the Law of Property Act 1925, which many could seek to exploit.
The case concerned a flat owner who was in desperate financial straits. As a result, she sold her leasehold interest to two buy-to-let investors for £30,000, even though her solicitors suggested that her property was worth considerably more. The investors funded the purchase via a bridging loan, which was succeeded almost immediately by a legal charge in favour of a third party. Neither lender knew that the seller expected to remain in situ as a tenant and her replies to enquiries and requisitions did not disclose that she had any claim on the property.
It was not long before the investors’ mortgagee took steps to evict the seller because the mortgage was in arrears, as was the rent. In the litigation that followed, the trial judge ruled that the sale should be set aside on the ground that it was an unconscionable bargain. The seller had been desperate, vulnerable, naïve and lacking in any business acumen or sense, and the buyer had taken unfair advantage of her by making her an offer that he knew to be dishonest.
How did this affect the mortgagee? The Court of Appeal decided that the right to have the transaction set aside was an equity, which was potentially an overriding interest because the seller was, and always had been, in actual occupation of the property. But any such interest had been overreached by the creation of a legal mortgage by two trustees.
The court explained that section 2(1)(ii) of the Law of Property Act 1925 applies to all equitable interests that are capable of being overreached by a conveyance by trustees. The section is not limited to beneficial interests under trusts. Equitable interests are themselves widely defined by section 1(8) of the 1925 Act – and the list of exclusions from overreaching in section 2(3) of the Act includes easements and estate contracts, demonstrating that the ambit of overreaching is very wide.
Lord Justice Lewison, who delivered the leading judgement, added that the right to have a transaction set aside is not a right that makes no sense unless it attaches to land itself. It could, at least in theory, shift to the proceeds of the buyers’ mortgage – which the seller could then use to buy herself another home.
Strictly speaking, this made it unnecessary to decide whether the seller had an overriding interest that overrode the mortgage. However, the court went on to consider the point anyway. In its view, it would have been reasonable for the seller to have disclosed, in her replies to enquiries and requisitions, that she was not giving vacant possession on completion because she was being granted a tenancy. Therefore, had it been relevant, her failure to do so would have deprived her of the ability to assert an overriding interest as against the mortgagee.
Allyson Colby is a property law consultant
