Brighton and Hove City Council v Audus

Legal charge – Purchase of long lease of flat – First charge securing sum of premium for lease provided by defendant to aunt – Second charge held in defendant’s favour securing increase in value of flat at time of redemption of first charge – Claimant council holding third charge – Whether second charge void as clog on equity of redemption of first charge – Whether transaction properly characterised as mortgage – Whether written documents reflecting agreement that defendant to own flat – Claim dismissedIn 1988, the claimant council granted a long lease of a flat to the defendant’s aunt and her husband, pursuant to the right-to-buy legislation, in return for a premium of £12,375 that was provided by the defendant. A legal charge over the property was executed to secure that that sum. On the same date and as part of the same transaction, a supplemental deed was also executed, purporting to create a second legal mortgage in favour of the defendant to secure the payment to him, on redemption of the first charge, of any increase in the base value of the property since the date of the charge and the date of redemption. His aunt became the sole owner of the property upon the death of her husband.In 2008, the claimants registered a third charge against the property pursuant to section 22 of the Health and Social Services Act 1983. They brought proceedings against the defendant, seeking a declaration that his second charge was void as a clog on the equity of redemption under the first charge and an order for rectification to remove the second charge from the register. The defendant argued that his aunt was estopped from disputing the validity of the second charge, and that such estoppel was also binding upon the claimants. He maintained that: (i) there had been a common intention, in 1988, that the defendant should receive the entire equitable estate in the lease; (ii) he had paid all service charges and expenses relating to the flat to date; and (iii) either the aunt had held the lease on constructive trust for him or he was absolutely entitled to it pursuant to the doctrine of proprietary estoppel.Held: The claim was dismissed. Most mortgages or charges involved a loan for the repayment of which the charge provided security. It was inherent in the concept of a mortgage or security interest that the borrower should be able to redeem it by repaying the money and thereby performing the obligation, the performance of which was secured. Equitable rules applied to protect the equity of redemption, in respect of mortgages or security interests, by rendering void mortgage terms that restricted the right to redeem: see G&C Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1914] AC 25 and Multiservice Bookbinding Ltd v Marden [1979] Ch 84. In establishing whether a transaction involved a mortgage or security interest, or had some other character, the court would look at the substance and not the form of the transaction. The question was whether the legal nature of the transaction, as disclosed by the documents, was a loan and whether the written document truly represented the agreement of the parties: Welsh Development Agency v Export Finance Co Ltd [1992] BCC 270 applied. Where there was a composite transaction, which included as one of its elements a genuine mortgage, it was open to the court to assess the overall character of the composite transaction as being other than a mortgage: Warnborough Ltd v Garmite Ltd [2003] EWCA Civ 1544 applied. The character of the composite transaction had to be assessed as a whole, including any provision that was alleged to be repugnant to a security transaction.The 1988 oral arrangement between the defendant and his aunt had not involved a loan of the premium for the lease. There had been no intention that the aunt and her husband would be entitled to repay that sum and thereby free the flat from any interest held by the defendant. The substance of the transaction, as contained in the two written documents and other terms agreed orally, was that the defendant would purchase the flat and have ownership of it, but that his rights were to be postponed to the right of his aunt and her husband to live in the flat for their lifetimes. Consequently, the equitable rules relating to mortgages and security interests did not apply. The defendant’s rights under the supplemental deed therefore had priority over the claimants’ rights under their statutory charge.Anthony Tanney (instructed by the legal department of Brighton and Hove City Council) appeared for the claimants; Clive Pithers (instructed by Hall Ennion & Young, of Ely) appeared for the defendant.Sally Dobson, barrister