City of london building society v Flegg

Facts

In 1977, Mr and Mrs Flegg sold their home of 28 years and used the £18,000 they made to help buy a property named "Bleak House", at 256 Grange Road, Gillingham, Kent, registered at HM Land Registry title number K467866. Their daughter and her husband, Mrs and Mr Maxwell-Brown had asked them to, and they put in the remaining £16,000 by taking out a mortgage. It was meant for them all to live in, but the daughter and husband registered as the owners, despite their solicitor advising all four of them be registered. Thus, Mr and Mrs Flegg had an equitable property right from their contributions to the purchase price, the Maxwell-Browns holding on trust for them. The Maxwell-Browns had money trouble and remortgaged with the City of London Building Society to raise £37,500 without the Fleggs' consent. The Fleggs were suspicious and entered a caution against dealings at the Land Registry. They defaulted and the building society sought possession.

Judgment

Court of Appeal

Dillon LJ held that, reversing the decision of the High Court, the Fleggs' interest in their home was not overreached through the building society's contract with the children.^[3]

“

Mr. Wakefield for the plaintiffs relied, in one of his arguments to the contrary, on the wording of section 20(1)(b) of the Land Registration Act 1925 under which, as quoted above, a disposition of registered land by the registered proprietor is subject "unless the contrary is expressed on the register, to the overriding interests, if any, affecting the estate transferred or created." He submits that, because it was overreached by the plaintiffs' mortgage under the overreaching provisions of the Law of Property Act 1925, the parents' interest never affected the estate transferred to or created in the plaintiffs by their mortgage. But this argument is inconsistent with the whole scheme of the Land Registration Act 1925 as interpreted in Boland's case. Moreover, if, as Lord Wilberforce held, the interest of the equitable tenant in common in actual occupation of the land "subsisted in reference to the land" within the meaning of section 70, it must equally, in my judgment, (being an interest by way of undivided share in the whole of the land and carrying a right to occupy the whole of the land) have affected the derivative estate, by way of term of years or deemed terms of years - cf. Grand Junction Co Ltd v Bates [1954] 2 QB 160 - which is the estate in the land which the plaintiffs have by virtue of their mortgage. This was the conclusion of Lord Denning MR in Boland's case [1979] Ch 312 , where he said, at p. 331: "Being an equitable interest in the land, it is clearly an interest 'subsisting in reference' to the land. It also affects 'the estate transferred' within section 20(1)(b)." Mr. Wakefield also relied on the words "for the time being" in the phrase in the opening words of section 70(1): "All registered land shall,... be deemed to be subject to such of the following overriding interests as may be for the time being subsisting in reference thereto..." He submitted that, because the parents' interest was overreached under the Law of Property Act 1925 on the creation of the plaintiffs' mortgage, it was thereafter not an overriding interest "for the time being" subsisting in reference to the land. But, again, this argument is inconsistent with the scheme of the Land Registration Act 1925 as explained in the passages in Lord Wilberforce's speech in Boland's case which I have quoted above. The argument is unreal in that the parents continued in actual occupation of the land despite the execution by the registered proprietors of the plaintiffs' mortgage of which the parents knew nothing.

”

Kerr LJ and Sir George Waller concurred.

House of Lords

The House of Lords held that the building society’s charge took priority, and could use the overreaching defence against the Fleggs’ pre-existing trust right. Although under the Land Registration Act 1925 section 70, people with actual occupation may have an overriding interest that would take priority over a third party, like the building society, this does not happen if the purchase money is paid to two or more trustees or a trust corporation. If that happens, under LPA 1925 section 2(ii) the interests of the beneficiaries will be overreached and will attach to the purchase price, not the property.
Lord Templeman said the following.^[4]

“

One of the main objects of the legislation of 1925 was to effect a compromise between on the one hand the interests of the public in securing that land held in trust is freely marketable and, on the other hand, the interests of the beneficiaries in preserving their rights under the trusts. By the Settled Land Act 1925 a tenant for life may convey the settled land discharged from all the trusts powers and provisions of the settlement. By the Law of Property Act 1925 trustees for sale may convey land held on trust for sale discharged from the trusts affecting the proceeds of sale and rents and profits until sale. Under both forms of trust the protection and the only protection of the beneficiaries is that capital money must be paid to at least two trustees or a trust corporation.

”

Lord Oliver gave a concurring judgment.