Lavin v Johnson

A sale, leaseback and option transaction is not necessarily a mortgage merely because it produces economic consequences similar to secured lending. The court must determine the transaction’s legal nature from the documents and admissible surrounding evidence. Where the documents genuinely effect a sale and option, economic compulsion to repurchase does not alone change that character.

Conversely, a transfer made pursuant to an arrangement securing payment may operate as a mortgage, preserving the borrower’s equity of redemption. The court may raise an unargued point in an exceptional case where necessary to do justice, but the conclusion must remain grounded in the evidence.

Mr Lavin claimed possession of agricultural land from Mr Johnson for rent arrears. Mr Johnson defended and counterclaimed, alleging that transactions described as sales, leasebacks and options were in substance extortionate credit bargains under the Consumer Credit Act 1974. He also alleged conversion of the title deeds to Eastfield Farm.

The Yeovil County Court held that the April 1994 arrangements constituted credit and an extortionate credit bargain. It also found conversion and ordered accounts, inquiries and related relief. Mr Lavin appealed. The central issues were the legal character of the April transactions, liability for conversion, and whether relief concerning Eastfield was nevertheless available.

1. Appeal. The appeal was allowed in relation to the recorder’s conclusions on the April transactions and conversion. The Court nevertheless divided on the legal effect of the October transfer of Eastfield Farm.
2. April transactions. The court applied the distinction explained in Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148 between the external route, where the documents do not represent the parties’ agreement, and the internal route, where their legal nature is determined from the documents. Mr Johnson did not allege sham. The professionally drafted agreements effected a sale, leaseback and call option. Their economic similarity to a mortgage, the commercial pressure to exercise the option, and occasional references to indebtedness or interest did not alter their legal character. They were therefore not credit transactions, and it was unnecessary to decide whether they were extortionate.
3. Conversion. Applying Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd [1992] 1 WLR 1253, demand is unnecessary where there is a positive act of withholding possession, but some positive withholding is required in the absence of demand. Mr Johnson’s faxes were not demands and there was insufficient evidence of refusal. The conversion finding could not stand.
4. Eastfield. The April Eastfield arrangement was, in substance, an equitable charge securing payment of the milk-quota money. A later transfer would perfect security, not transfer the equity of redemption. Lord Justice Robert Walker and Sir Martin Nourse held that the October documents and surrounding communications were most consistent with continuing security. The Rule 72 transfer therefore vested Eastfield in Mr Lavin as mortgagee, who had to account accordingly. The issue whether he was a mortgagee in possession was remitted to the County Court. Lord Justice Pill dissented on this issue, holding that the evidence did not justify departing from the transfer’s apparent absolute effect.
5. The matter was remitted for an account. Any balance due to Mr Lavin could be set off, with retransfers considered in consequence.

• Court of Appeal (Civil Division) allowed Mr Lavin’s appeal from the Yeovil County Court’s order, while by majority granting relief concerning Eastfield Farm and remitting the accounting issue.
• Yeovil County Court held that the April arrangements were an extortionate credit bargain under the Consumer Credit Act 1974, found conversion of the Eastfield title deeds, and ordered accounts and inquiries.