Scottish & Newcastle Plc v Lancashire Mortgage Corporation Ltd

Where a lender knows that another lender will advance money only on the belief that it will have first call on the secured property, stands by while the advance is made, accepts its benefit and later asserts a registered priority inconsistent with that belief, proprietary estoppel may prevent it from doing so. The equity may be satisfied by treating the sale proceeds as held so that the other lender is paid first.

The estoppel does not alter the statutory order of registration. It affects the parties’ beneficial entitlement to the net proceeds. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 does not bar that result where there was no contract for a disposition and the equitable intervention overlaps with a constructive trust.

LMC advanced £30,000 to the Pexmans on the stated basis that it would have a first legal charge over their house and club. S&N knew of that expectation, received £20,000 from the advance, and took charges over both properties. Because of the order in which the charges were registered, S&N’s charge over the house had statutory priority under section 29 of the Land Registration Act 1925.

HHJ Howarth held that S&N was estopped, by convention or proprietary estoppel, from denying LMC priority. He declared LMC’s charge first and ordered rectification of the register. S&N appealed. The central issue was whether estoppel could alter the practical priority between the chargees despite the statutory registration priority.

1. Appeal dismissed, subject to variation of the relief. The judge was entitled to find that S&N knew that LMC would advance only if it received first-ranking security over both properties. S&N stood by while LMC advanced the money in that expectation, received £20,000 from the advance, and later sought to rely on its registered priority over the house. That was passive acquiescence, not a case requiring a positive representation or promise. It was unconscionable for S&N to assert priority over LMC in the sale proceeds.

2. Proprietary estoppel could therefore prevent S&N from asserting, as against LMC, a prior beneficial entitlement to the net proceeds of sale. The court did not alter the legal priority fixed by section 29 of the Land Registration Act 1925. Rather, the equity overlapped with a constructive trust of the proceeds and required LMC to be paid first.

3. Section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 did not invalidate that result. There was no contract between the lenders for a sale or other disposition of land. The substantive consequence was a variation in their beneficial interests in the proceeds. Further, section 2(5), as explained in [2000] Ch 162, permits equitable intervention by proprietary estoppel where it coincides with or overlaps a constructive trust.

4. The order for rectification was inappropriate because the register correctly recorded the statutory legal priority. It was replaced with a declaration that LMC was entitled to payment in full from the net proceeds of the house before any payment to S&N.

5. Mummery LJ’s discussion of estoppel by convention was unnecessary to the disposition. His provisional view was that it was not established: the asserted priority concerned a future state of affairs, whereas that doctrine requires a shared assumption or acquiesced assumption about an existing factual or legal state of affairs. Sedley and Moore-Bick LJJ agreed.

• Court of Appeal (Civil Division): S&N’s appeal was dismissed. The court varied the order by deleting rectification of the register and declaring that LMC must be paid in full from the house-sale proceeds before S&N.

• High Court, Chancery Division, Manchester District Registry: On 24 February 2006, HHJ Howarth held that S&N was estopped from denying LMC’s priority and ordered a declaration of priority together with rectification of the register.