City of London Building Society v Flegg

Where capital money is paid to two trustees for sale on a legal mortgage, the beneficiaries’ interests are overreached. A beneficiary’s actual occupation does not preserve a right to remain against the mortgagee once the beneficial interest from which occupation derives has been overreached.

Section 14 of the Law of Property Act 1925 does not create or enlarge an occupier’s interest. Similarly, section 70(1)(g) of the Land Registration Act 1925 protects only rights then subsisting in relation to the land. Actual occupation is not an interest in itself. Williams & Glyn’s Bank v Boland [1981] AC 487 concerned interests which had not been overreached.

The registered proprietors of a house held it on a trust for sale for themselves and Mr and Mrs Flegg, who had contributed substantially to its purchase price and occupied it. Without the Fleggs’ knowledge, the proprietors granted the appellant building society a legal mortgage in breach of trust. The advance was paid to both trustees.

Judge Thomas ordered the Fleggs to give possession. The Court of Appeal unanimously allowed their appeal, holding that their actual occupation gave them an overriding interest, substantially following Williams & Glyn’s Bank v Boland [1981] AC 487. Its judgment is reported at [1986] Ch 605.

The central issue was whether actual occupation by beneficiaries prevented their interests from being overreached by a legal mortgage granted by two trustees.

1. Appeal allowed unanimously. Lord Templeman and Lord Oliver of Aylmerton each gave substantive reasons. Lord Bridge of Harwich, Lord Mackay of Clashfern and Lord Goff of Chieveley expressly agreed with both speeches. The House reversed the Court of Appeal and restored Judge Thomas’s possession order.
2. Overreaching. Per Lord Templeman, the building society paid capital money in good faith to two trustees for sale. Under sections 27 and 28 of the Law of Property Act 1925, the respondents’ beneficial interests were overreached and transferred to the equity of redemption and the mortgage advance. Their loss resulted from the trustees’ failure to account for the money, not from a prejudicial effect of the overreaching provisions.
3. Occupation and section 14. Per Lord Oliver, the right of an occupying beneficiary to enjoy the property in specie is derived from the beneficial interest under the trust. It is not a separate, free-standing right. Section 14 does not enlarge that interest or preserve it after the trustees have validly exercised their statutory powers. To hold otherwise would defeat the statutory scheme that permits purchasers and mortgagees dealing with two trustees to take without investigating beneficial interests.
4. Registered land and overriding interests. Section 70(1)(g) of the Land Registration Act 1925 protects rights of an actual occupier only while they subsist in relation to the land. Actual occupation alone creates no interest. Once the underlying beneficial interest was overreached, there was no right capable of binding the mortgagee as an overriding interest. Williams & Glyn’s Bank v Boland [1981] AC 487 did not assist because it involved a sole trustee, so no overreaching occurred.
5. Registration. Per Lord Oliver, the charge overreached the respondents’ interests when it was executed and the advance made. The building society was entitled to registration despite the later-entered caution; the case was not a contest between competing equitable interests.

• House of Lords: Allowed the building society’s appeal, reversed the Court of Appeal’s order, restored Judge Thomas’s possession order, and remitted the cause to the Chancery Division.
• Court of Appeal: On 4 December 1985, unanimously allowed the Fleggs’ appeal and held that their actual occupation bound the mortgagee: [1986] Ch 605.
• Chancery Division: On 31 July 1985, Judge Thomas ordered the respondents to deliver up possession to the building society.