This recent case considered whether a person who had an overriding interest can be taken to have authorised a charge and so be bound by it.
Mrs Qutb had suffered from Alzheimer’s disease for a number of years. In 2001, she sold her property to Mr Hussain. Mr Hussain entered into a charge in favour of the Bank of Scotland (“the Bank”) as security for the loan to fund his purchase of the property. In 2005, Warren J held that the sale to Mr Hussain should be set aside as it was at an under value, it had been procured by Mr Hussain’s undue influence and it was an unconscionable bargain. The Court ordered that the property should be transferred back to Mrs Qutb, but should be subject to the legal charge in favour of the Bank. Mrs Qutb was granted an indemnity from Mr Hussain in respect of the sums payable under the charge.
The Bank commenced possession proceedings and Mrs Qutb now sought to deny that she was bound by it.
As a first point, the Court considered whether Mrs Qutb could challenge the charge in the light of the previous proceedings.
The Bank sought to argue that in the light of the previous decision, Mrs Qutb was now prevented from disputing the Bank’s charge. The Court decided that the cause of action which she now asserted against the Bank was not the same as the cause of action in the previous action. The basis of her claim against the Bank was different to that of her claim in the previous proceedings. Findings had been made in relation to allegations which were advanced only against Mr Hussain and, therefore, this did not prevent her from raising these different issues against the Bank.
The Bank also claimed that her defence and counterclaim represented an abuse of process as the defence she now raised, which was that she had an overriding interest could have been brought in the previous action. Previously, the Bank had applied, but without success, to strike out the claim on this basis. As the Court had previously refused to grant this application, the Court here decided to bar the Bank from asserting the abuse of process argument once again.
Section 70(1)(g)
The Court could now consider the claim that she had an overriding interest which took priority to the Bank. Mrs Qutb relied on section 70(1)(g) of the Land Registration Act 1925, which was the relevant provision in force when the charge was taken. In essence, the effect of section 70(1)(g) was that if Mrs Qutb was in actual occupation of the property and the Bank had not made enquiry of her then it would be bound by any right that she had.
The first question the Court had to consider was whether she was in actual occupation. There was no doubt that Mrs Qutb had occupied the property in the past, but the question was whether she was still in occupation when the charge was granted on 29 January 2001. It was accepted that a person can be in “actual occupation” of more than one property. On the evidence there was evidence that Mrs Qutb had occasionally stayed at the property and although the mere presence of her furniture would not usually count as actual occupation, it appeared that she was not intending to leave the property and so in the circumstances the Court found that she was in actual occupation.
The Court then looked at the position where persons with overriding interests have been taken to have authorised the charge and so are bound by it. The Court held that a person claiming not to bound by the charge can be held to have given the legal owner actual authority to enter into it or to have ratified it. As such, the charge will be binding on ordinary agency principles or it could be explained as a form of proprietary estoppel. Proprietary estoppel arises where one party represents that he is transferring an interest in land to another, but what is done has no legal effect, or knows that the other party will spend money or otherwise act to his detriment in reliance on the supposed or promised transfer.
In the case of Paddington Building Society v Mendelsohn (1985), the court decided that the mother knew and intended that the charge was to be granted to the society and that without the charge, the flat which she claimed to have an interest could not have been acquired. The only possible intention was to impute to the parties an intention that the mother’s rights were to be subject to the rights of the society.
In this case, the Court held that:
- Mrs Qutb will have (or ought reasonably to have) appreciated that Mr Hussain was going to charge the property.
- Mrs Qutb represented to Mr Hussain’s solicitors who were also the Bank’s solicitors that the property would be sold with vacant possession and that she would not retain any rights to it. In the contract for the sale of the property and in the replies to the requisitions on title she confirmed that vacant possession would be given on completion. The transfer stated that the property was being transferred with full title guarantee.
- The Bank relied on these representations by proceeding with the loan. It was reasonable to do so as it had no notice of Mrs Qutb’s incapacity or undue influence or unconscionable bargain.
- Almost all the money advance by the Bank found its way into her bank account. It accrued to her benefit regardless of whether Mr Hussain then misappropriated it.
The Court also considered whether her lack of capacity meant that there could be no estoppel. The Judge held that as the Bank had no notice of her lack of capacity it could not be affected by it.
Mrs Qutb also sought to argue that the Bank should have been alerted to the fraud by the fact that the property price was reduced and the size of the gift fluctuated in accordance with Mr Hussain’s requirements. However, the Bank had no reason to doubt that vacant possession would be given since it is not unusual for properties to be transferred at less than market value when being transferred to a friend or family member.
Accordingly the Bank was entitled to possession.
This case is very helpful to lenders as it confirms that even though a person may have been in actual occupation of the property when the charge is taken, they may still be bound by it. If faced with a claim that an occupier has an overriding interest, which takes priority to a bank’s charge, consideration should be given to the following factors:
- Whether the occupier should (or ought reasonably to have) appreciated that the property was going to be charged.
- Whether the occupier made any representations to the lender. The court will look at the contract of sale, the requisitions on title and the transfer documentation.
- Whether the lender relied on any representations and if so, whether it is reasonable to rely on those representations.
- Whether the occupier received any benefit from the transaction.
In these circumstances, despite the existence of an overriding interest, it may not be possible for the occupier to deny that they are bound by the charge.
The Governor And Company Of The Bank Of Scotland v Afzaal Hussain and Mona Qutub (by her litigation friend) [2010] EWHC 2812