Buhr & Ors v Barclays Bank Plc

Non-registration of a class C land charge makes it void against a purchaser, but does not extinguish the charge between mortgagor and mortgagee or remove proprietary rights arising under general law. Where a mortgagor makes an unauthorised disposition which destroys the mortgagee’s security, equity automatically transfers the security interest to identifiable property representing the mortgaged property, including sale proceeds. The mortgagor is fiduciary in relation to such substitutions, although not generally fiduciary, and an equitable charge is itself proprietary. The mortgagee may also adopt the unauthorised sale, requiring the proceeds to be kept separate and held on trust, subject to prior charges. The statutory trust governing proceeds received by a mortgagee on its own sale is analogous but is not the source of the result.

Barclays held a second charge over the Buhrs’ farm. The charge was registered incorrectly and was therefore ineffective against a purchaser of the land. The farm was later sold with full title guarantee, and the balance of the purchase money, after payment of the first mortgagee, was held in the solicitors’ client account.

On a preliminary issue, His Honour Judge Weeks QC declared that Barclays had a proprietary interest in the surplus proceeds, held under a constructive trust. The appellants challenged that conclusion, arguing that the unregistered charge did not automatically attach to the proceeds and that no constructive trust or equitable charge arose. The central issue was whether the mortgagors’ sale destroyed Barclays’ proprietary security or caused it to attach to the property representing the mortgaged land.

Appeal dismissed. Arden LJ delivered the substantive judgment, with Tuckey LJ and the Lord Chief Justice agreeing.

1. Section 4(5) of the Land Charges Act 1972 makes an unregistered class C land charge void against a purchaser of the charged land or an interest in it. It does not invalidate the charge between the parties or remove proprietary rights conferred by general law. The purchaser’s absolute interest displaces the mortgagee’s estate in the land, but the security may continue in substituted property.
2. Equity recognises a general principle that a mortgagee is entitled to accretions to, and substitutions for, the mortgaged property. The principle was supported by Hughes v Howard (1858) 25 Beav. 575, Leigh v Burnett (1885) 29 ChD 231 and Law Guarantee and Trust Co Ltd v Mitcham and Cheam Brewery Co Ltd [1906] 2 Ch 98.
3. The Buhrs’ sale was unauthorised because it purported to pass the fee simple free of Barclays’ charge and thereby destroyed Barclays’ security. A security interest in the sale proceeds therefore arose automatically when the Buhrs became entitled to them. The discussion of book-debt authorities, including Agnew v The Commissioner of Inland Revenue, was distinguished as arising in a different context.
4. The mortgagor has no general fiduciary duty to the mortgagee, but is fiduciary in the specific matter of accretions to or substitutions for the mortgaged property. An equitable charge does not transfer ownership, but it gives the chargee a proprietary interest, as explained in Bland v Ingrams Estate [2001] 1 WLR 1638. Alternatively, Barclays could adopt the sale and require the proceeds to be kept separate and held on trust, subject to prior charges.
5. The all-estate clause under section 63 of the Law of Property Act 1925 was unnecessary. The analogy with the statutory trust under section 105 was also unnecessary because the proprietary interest arose from substitution. The court did not accept that a mortgagee could elect for a charge over proceeds where all parties consented to a sale subject to the mortgage; that observation was unnecessary to the decision.
6. The appeal was dismissed. The respondent was ordered to pay the appellant £27,500 and the claimant’s costs of the action below, subject to detailed assessment.

1. Court of Appeal (Civil Division): Dismissed the appeal from the preliminary-issue order of the Chancery Division.
2. Chancery Division, Bristol District Registry: His Honour Judge Weeks QC declared that Barclays had a proprietary interest in the sale proceeds, which were held under a constructive trust.