City of London Building Society v Flegg

It is not correct that actual occupation alone creates an interest immune to statutory overreaching; where trustees for sale comply with the statutory machinery and capital money is paid to two trustees (or a trust corporation), equitable interests in land are overreached and converted into interests in the proceeds of sale and into rights in the equity of redemption. Rather than rendering the purchaser liable to a myriad of unregistered beneficial claims, the Land Registration Act 1925 and the Law of Property Act 1925 operate together to protect purchasers and mortgagees who comply with the statutory requirements.

The case concerned whether beneficial interests of occupiers under a trust for sale were protected as overriding interests against a mortgagee who advanced money to trustees for sale. The property had been held on trust for sale for four beneficiaries, two of whom were in actual occupation. The registered owners (two co-trustees) granted a legal charge in breach of trust and received capital from the mortgagee. The Chancery Division (Judge Thomas) ordered possession to the mortgagee. The Court of Appeal reversed. The House of Lords restored Judge Thomas's order and allowed the mortgagee's appeal, addressing the interaction between sections of the Law of Property Act 1925 and the Land Registration Act 1925 and the decision in Williams & Glyn's Bank v Boland.

1. The appeal is allowed and the order of Judge Thomas is restored; the Court of Appeal's order is reversed (disposition: possession to the mortgagee).
2. Where trustees for sale exercise powers to raise capital by mortgage and capital monies are paid in accordance with section 27(2) to not fewer than two trustees (or to a trust corporation), any equitable interests of beneficiaries in the land are overreached and become interests in the proceeds of sale and, where applicable, in the equity of redemption only.
3. Actual occupation does not of itself create an independent legal interest impervious to overreaching. Occupation may elevate a subsisting equitable interest into an overriding interest only so long as the parent equitable interest remains subsisting in relation to the land.
4. Section 70(1)(g) of the Land Registration Act 1925, which protects rights of persons in actual occupation, must be read in the context of the Law of Property Act 1925. It does not preserve against a purchaser or mortgagee rights which have been overreached by compliance with the statutory overreaching machinery.
5. The House of Lords explained and limited the effect of Williams & Glyn's Bank v Boland: Boland is confined to cases where overreaching has not occurred (for example, where capital money is paid to a sole trustee). It does not govern cases where the statutory requirements for overreaching have been complied with.
6. The fact that the mortgage deed had not yet been registered did not defeat the overreaching which occurred upon execution of the charge and advance of the money; the trustees' exercise of power created the overreaching at that point.
7. Accordingly, the respondents' beneficial interests were overreached and did not operate as overriding interests to defeat the appellants' charge; the respondents must deliver up possession. The cause is remitted to the Chancery Division to act consistently with this judgment and costs directions are given as stated.

• House of Lords: Allowed the appeal; reversed Court of Appeal and restored Judge Thomas's order (14 May 1987).
• Court of Appeal: Allowed the respondents' appeal and set aside Judge Thomas's order (4 December 1985).
• Chancery Division (Judge Thomas): Ordered possession to the mortgagee (31 July 1985).