Whale & Ors v Viasystems Technograph Ltd & Ors

In determining priority between equitable interests, the court must examine the commercial and practical substance of the relevant dealings rather than their sequential conveyancing form. The principle in Cann is not confined to a conventional purchase-money mortgage.

Where the acquisition of a superior lease and the grant of an underlease are directly connected, completed together, and funded by the underlessee's payment, the superior lessee may in equity acquire only the retained reversion. A prior debenture charge then attaches only to that reversion and does not defeat the underlease. The availability of alternative finance does not alter the result where the transaction was in fact structured and completed in that way.

The company held an option to acquire a 125-year headlease. It had previously granted a debenture creating fixed and floating security over its present and future assets. After exercising the option, it contracted to grant Grantax an underlease for all but three days of the headlease term. The headlease and underlease were completed on the same day, and Grantax's payment was used to fund the acquisition of the headlease.

A deputy High Court judge held that, in equity, the company acquired only the nominal reversion and that the underlease, and the Bank of Scotland's charge over it, took priority over the debenture. The subrogation claimants and the liquidators appealed. The central issue was whether the principle in Abbey National Building Society v Cann [1991] 1 AC 56 applied to that linked headlease-and-underlease transaction.

1. Appeal dismissed. Jonathan Parker LJ held, with whom Aldous LJ agreed, that the deputy judge was correct. Grantax's underlease and the Bank's charge over it had priority over the debenture charge.

2. Following Abbey National Building Society v Cann [1991] 1 AC 56, priority between equitable interests is determined by the substance and commercial reality of the transaction. Conveyancing steps which are necessarily sequential do not create a decisive moment at which an unencumbered estate can be treated as having vested. This approach applies generally to equitable-priority disputes. It is not confined to a purchase completed with a mortgage or other acquisition finance.

3. On the facts, the exercise of the option, the acquisition of the headlease, and the obligation to grant the underlease were directly connected. Completion of the headlease and underlease occurred together, and Grantax's money was used to complete the headlease acquisition. It was therefore unreal to regard the company as having acquired an unencumbered 125-year term. In equity it acquired only the three-day reversion retained after the underlease. The earlier debenture could attach only to that reversion.

4. The company's ability hypothetically to seek other finance was immaterial. The relevant reality was the structure actually adopted and completed. Further, the option was expressed to be inalienable without the grantor's consent. That prevented third-party interests in its benefit, and the debenture's excluded-assets provision consequently kept the option outside its fixed security.

• Court of Appeal (Civil Division): dismissed the appeals and affirmed the priority of the underlease and the Bank's charge: [2002] EWCA Civ 480.
• High Court, Chancery Division, Bankruptcy Court: on 11 March 2002, Mr Michael Briggs QC, sitting as a deputy High Court judge, decided the priority issue for Grantax and the Bank. The lower-court citation was not stated in the judgment.