Halifax Building Society v Thomas

A mortgagee induced by fraud to make an advance cannot retain the surplus proceeds of sale after affirming the mortgage and recovering the secured debt in full. Law of Property Act 1925, section 105 requires the surplus to be held for the person entitled to the mortgaged property.

The mortgagor’s wrongdoing alone does not create a general right to restitution of profits or convert the relationship of debtor and secured creditor into a constructive trust. An “all accounts” mortgage condition securing money owing on any account covers indebtedness arising from debtor-creditor accounts. It does not cover a separate liability to account for profits.

A mortgagor obtained a 100 per cent advance from a building society by fraudulent representations about his identity and creditworthiness. After default, the society affirmed the mortgage, sold the flat as mortgagee and recovered everything due under the mortgage. It retained the surplus proceeds in a suspense account.

The Crown Prosecution Service subsequently obtained confiscation and charging orders affecting the mortgagor’s interest in that account. The society sought a declaration that it could retain the surplus through restitution for wrongdoing or a constructive trust. Judge Maddocks QC, sitting as a High Court judge, dismissed the claim.

The central issue on the society’s appeal was whether a fully satisfied secured creditor could take the surplus profit derived from the mortgagor’s fraud, notwithstanding section 105 of the Law of Property Act 1925.

1. Appeal dismissed unanimously. Peter Gibson LJ delivered the leading judgment. Simon Brown LJ agreed, and Glidewell LJ agreed entirely with the reasoning and conclusions.

2. Section 105 of the Law of Property Act 1925 required the society, after payment of the secured debt, interest, costs and proper sale expenses, to hold the surplus for the mortgagor. The mortgage condition securing money owing “on any account” concerned debtor-creditor accounts. It did not secure a distinct liability to account for profits. The mortgagor therefore became entitled to the surplus upon the sale.

3. The society had affirmed the voidable mortgage and obtained full satisfaction as a secured creditor. That election was inconsistent with claiming more than its contractual entitlement through an account of profits. There was no established English principle requiring a wrongdoer to surrender every gain made through wrongdoing, particularly where the gain neither represented property lost by the claimant nor resulted from use of the claimant’s property. The fraud was not, by itself, a sufficient basis for restitution.

4. The argument based on justice or public conscience did not establish a restitutionary entitlement. Tinsley v Milligan [1994] 1 AC 340 rejected public conscience as the governing test for recognising rights connected with illegality.

5. Fraud also did not give the society a constructive trust over the equity of redemption or surplus. The mortgage remained in force, and the parties’ relationship remained that of debtor and secured creditor. English law had not adopted a remedial constructive trust which converts an obligation to repay an outright loan into beneficial ownership. Legislative provision for confiscating criminal gains further counselled against creating such a proprietary remedy by extending general principles.

6. The society had no other basis for defeating the mortgagor’s title or the confiscation and charging orders. The appeal was dismissed with costs.

1. Court of Appeal: The society’s appeal was dismissed unanimously, with costs.

2. High Court: Judge Maddocks QC dismissed the society’s action for a declaration that it could retain the mortgage-sale surplus. He held that unjust enrichment and constructive trust principles did not displace the mortgagor’s entitlement.