In this case, the High Court considered whether an occupier, in actual occupation of a property, was bound by a legal charge that was taken out by another person who was acting as an agent for the occupier.
The facts of this case are very complex and involve a number of different, but related, parties and a series of interlinked business transactions. In summary, this case started as a mortgage repossession claim brought by the Claimant to obtain possession of a residential property in Kent (the “Property”). A company named Kaymuu Limited (“Kaymuu”), the first Defendant in these proceedings, was the registered proprietor, and held the legal title for the Property. Kaymuu was controlled by Mr S Mudurogulu (“Mr M”) and he solely dealt with all the mechanics of the purchase of the Property. Mr Wishart (“Mr W”), the second Defendant and a friend and business associate of Mr M, occupied the Property with his wife on the understanding that he was to be the beneficial owner of the Property.
In 2010, Mr M, on behalf of Kaymuu and without the knowledge or consent of Mr W, took out a mortgage from the Claimant and secured it, by way of first legal charge, over the Property. Prior to making the loan, the Claimant sent a valuer to the Property who concluded that the Property was adequate security and that it was vacant.
The mortgage fell into arrears and the Claimant issued repossession proceedings. Possession was obtained and the Property was sold for £1.1million. The Claimant sought to retain £694,072.75 from the net proceeds of sale to realise its security. Mr W claimed that he was entitled to retain all the money on the basis that he had beneficial ownership of the property which overrode the Claimant’s charge.
In reaching a conclusion, the Court considered whether:
a) Mr W was the beneficial owner of the Property;
b) If Mr W was the beneficial owner, did his interest override that of the Claimant;
c) If the Claimant’s charge was enforceable, was the Claimant entitled to recover its costs from the surplus.
In considering the above questions, the Court found as follows:
The Court established, having heard evidence from 15 witnesses, and by applying settled case law to the specific facts, that the Property was held on a constructive trust for Mr W and that the beneficial ownership of the Property was therefore vested in Mr W and had been since the completion of the purchase. On this basis, the Court found that he was entitled to, at least, the surplus of the funds from the sale, subject to the competing claims for it.
Did Mr W’s interest override that of the Claimant
The Court then considered whether Mr W’s beneficial interest overrode the Claimant’s legal charge, therefore preventing the Claimant retaining the funds required to redeem their loan. In reaching a decision, the Court scrutinised the relationship between Mr M and Mr W and the events leading up to, and following, the purchase of the Property. The Court considered, and applied, the findings in Rimmer v Webster [1900-3] All ER Rep Ext 1364 which held that where an owner of property gave all the indicia of title to another person with the intention that he should deal with the property, the principles of agency apply and any limit which he had imposed on his agent’s dealing could not be enforced against an innocent purchaser, or mortgagee from the agent, who had no notice of that limit. In this case, the Court found that Mr W had abstained from any involvement in the mechanics of the purchase of the Property and therefore that he had given Mr M the means of representing himself as the beneficial owner of the Property, with full authority to deal with third parties as owner. Accordingly, Mr M was prohibited from asserting his beneficial ownership of the Property in priority to the Claimant’s charge. The Court found that it had been incumbent on Mr W to bring his interest to the attention of the mortgagee, if he had wished to establish the priority of his beneficial interest to the Claimant’s charge and could have done so by mentioning it to the surveyor or enquiring who his principal was. It therefore followed that Mr W was bound by the Claimant’s charge and, accordingly, the Claimant was entitled to retain the sum of £694,072.75, being the amount, including interest, required to discharge the debt owed to it by Kaymuu.
Was Mr W in actual occupation of the Property applying the tests in paragraph 2 of Schedule 3 to the Land Registration Act 2002
Interestingly, and although not relevant given the above finding, the Court went on to consider whether Mr W’s beneficial interest would have overridden the Claimant’s interest under s29 and paragraph 2 of Schedule 3 to the Land Registration Act 2002. This provides that an interest belonging, at the time of the disposition, to a person in actual occupation will override a registered disposition, so far as the interest relates to the land of which the person is in occupation. On the facts, the court concluded that Mr W was in occupation of the Property and that had a reasonably careful inspection been carried out at the time the mortgage was taken out, the occupation of Mr W would have been obvious. On this basis, the Court held that if Mr W’s interest had been of such a nature and quality as to enjoy priority over the Claimant’s charge, it would not have been postponed to that charge by virtue of the charges registration because Mr W’s interest was one that would have been protected under paragraph 2 of Schedule 3 to the Land Registration Act 2002.
Recovery of the Claimant’s costs of defending the proceedings
The Court found that the Claimant was not entitled to recover, from the surplus funds, its costs of defending Mr W’s claim. In reaching this conclusion, the Court considered the rules laid down in Parker-Tweedale v Dunbar Bank PLC  Ch 12. In that case, the Court found that the bank was not entitled to reimbursement of its costs out of the mortgage security even though they were properly incurred, because the case fell outside the general rule that a mortgagee was entitled to recover out of the mortgage security his costs of defending proceedings between the mortgagee and a stranger where the stranger impugned the title to the mortgaged property, but instead fell within the exception that costs incurred with defending proceedings by a stranger which impugned the mortgagee’s title to the mortgage rather than to the estate or which impugned the exercise of the mortgagee’s powers were not recoverable out of the mortgage security. In this case, the Court found that the latter scenario applied and that as the mortgage terms and conditions did not expressly contract out of the exception, then the Claimant was unable to recover, from the surplus, its costs of defending Mr W’s claim. The Claimant was however entitled to recover its initial costs of the proceedings against Kaymuu to obtain possession of the property. Those costs had been incurred in the ordinary course of enforcing the mortgage contract and realising its security, and fell within the first category of costs identified in Parker-Tweedale.
Whilst this case does not create any new law, it is a reminder to lenders that there are alternative routes of defending claims when an individual is claiming an overriding interest and can prove that they were in actual occupation of the property prior to the charge being secured. This case confirms that an occupier’s interests can be defeated by the ordinary agency principles and that if an occupier gives a third party the means of representing himself as the beneficial owner of the property, with full authority to deal as owner with the lender, then the beneficial owner will be bound by their actions, and any dispositions made by them.
For further information, please contact Georgina Squire or the Partner with whom you usually deal.