Burnett's Trustee (Respondent) v. Grainger and another (Appellants)

Under Scots law, delivery of a disposition does not transfer the real right in land. The purchaser remains uninfeft until the disposition is recorded or registered. Until then, the seller's real right forms part of the estate vesting in a permanent trustee under section 31(1) of the Bankruptcy (Scotland) Act 1985.

The trustee is treated as an adjudging creditor. He may therefore complete title despite knowing of the earlier disposition, and his registered right defeats the purchaser's prior personal right. The good-faith rule restraining a later purchaser does not restrain legal diligence. Property expressly held on trust is excluded, but a completed contract and delivered disposition do not themselves create a trust.

The appellants bought a flat from Mrs Burnett, paid the price, received a disposition and entered into possession. Their solicitors did not record the disposition for about 14 months. Mrs Burnett's estate was meanwhile sequestrated. The respondent, her permanent trustee, knew about the sale but recorded his notice of title before the appellants recorded their disposition.

The sheriff declared that the flat vested in the respondent and granted warrants concerning occupation and ejection. The sheriff principal allowed the purchasers' appeal and dismissed the action. An Extra Division of the Court of Session, reported at 2002 SLT 699, restored the sheriff's order.

The central question was whether the flat remained part of Mrs Burnett's “whole estate” vesting in the permanent trustee under section 31(1) of the Bankruptcy (Scotland) Act 1985, and whose subsequently registered title had priority.

1. The appeal was refused unanimously on the live issue. Lord Rodger of Earlsferry delivered the principal speech. Lord Hope of Craighead agreed and gave additional reasons. Lord Bingham of Cornhill agreed with both. Lord Hoffmann and Lord Hobhouse of Woodborough agreed in the result, although each expressed reservations. The declarator that the flat vested in the permanent trustee was affirmed. The orders concerning occupation and ejection were recalled because circumstances had changed.

2. Per Lord Rodger and Lord Hope, Scots law maintains an unbridgeable distinction between personal and real rights. Delivery of a disposition gives the purchaser a personal fee and extensive powers associated with ownership. It does not transfer the real right in land. That right passes only when the disposition is recorded or registered. Before then the purchaser's right remains vulnerable to a third party who obtains a competing real right by legal execution.

3. Section 31(1) of the Bankruptcy (Scotland) Act 1985 vested Mrs Burnett's real right in the respondent as part of her “whole estate”. The personal obligations arising from the disposition bound Mrs Burnett but did not qualify her real right against her creditors or the permanent trustee. The statutory act and warrant treated the trustee as an adjudging creditor, not merely as a purchaser.

4. An adjudging creditor may complete diligence despite knowing about an earlier unrecorded disposition. The good-faith rule illustrated by Rodger (Builders) Ltd v Fawdry applies to a later voluntary purchaser, but not to a creditor exercising legal diligence. The respondent was therefore entitled, and obliged in the creditors' interests, to exploit the appellants' failure to record promptly.

5. Sharp v Thomson 1997 SC (HL) 66 was distinguished. It construed the relatively recent expression “property and undertaking” in floating-charge legislation. Section 31(1), by contrast, reproduced language with a long history and incorporated the established law of adjudication and bankruptcy.

6. Per Lord Hope and Lord Rodger, the transaction did not create a trust. Scots law required an identifiable intention and express declaration of trust, together with delivery, transfer or its equivalent. The disposition contained no declaration of trust. Lord Hobhouse considered, obiter and without argument, that section 33(1) and the authorities provided an arguable route to treating the seller as a bare trustee. That view did not affect the result.

7. Because the respondent recorded first, the Real Rights Act 1693 gave his infeftment priority over the appellants' later infeftment. The House reserved questions about whether the defeated purchasers could rank as unsecured creditors and whether an unjust-enrichment claim might arise.

1. House of Lords: The appeal was dismissed on the live issue. The House affirmed the declarator that the property vested in the permanent trustee, while recalling orders concerning occupation and ejection because circumstances had changed.
2. Extra Division of the Court of Session: The respondent's appeal was allowed and the sheriff's order was restored: 2002 SLT 699.
3. Sheriff principal: The purchasers' appeal was allowed and the action was dismissed.
4. Sheriff: Decree was granted declaring that the purchasers were not entitled to occupy the flat, that the property vested in the permanent trustee, and authorising summary ejection.