Overreaching
Overreaching - three statutory preconditions for overreaching
Before the disponee of a legal estate held on trust can properly claim to have overreached, or taken title free of, the interests of beneficiaries under that trust, he must show that the statutory preconditions for overreaching have been satisfied.
Section 2(1)(ii) of the Law of Property Act 1925 provides that:
A conveyance to a purchaser of a legal estate in land shall overreach any equitable interest or power affecting that estate, whether or not he has notice thereof, if … the conveyance is made by the trustees of land and the equitable interest or power is at the date of the conveyance capable of being overreached by such trustees … and the requirements of section 27 of this Act respecting the payment of capital money arising on such a conveyance are complied with …
1. Two Trustee Rule
It is vital precondition of overreaching under section 2(1)(ii) of LPA 1925 that the disponee must comply with the requirements of section 27 of this Act respecting the payment of capital money. Under this provision the proceeds of sale shall not be applied by the direction of fewer than two persons as trustees. This two trustee rule is a principle of stern application.
The insistence on strict observance of the two trustee rule marks a pragmatic recognition that a payment made to two trustees of land is much less likely to be misappropriated or misapplied than a payment made to a single individual.
2. Payment to Trust Corporation
Statute allows overreaching to occur where payment has been made to a trust corporation - LPA 1925, s.27(2)
3. Payment to a sole personal representative
The ‘two trustee rule’ does not affect the right of a sole personal representative to give a valid receipt for, or direct the application of, proceeds of sale or other capital money.
Absence of Capital Money on Disposition
A mere failure to pay capital money to two trustees of land cannot, in itself, prevent overreaching of trust interests if no capital money actually arises on the disposition of the legal estate by the trustees (example in the case of an exchange of land). This third category exception to the otherwise stringent ‘two trustee rule’ is beginning to gather importance.
In State Bank of India v Sood [1997], the Court of Appeal confirmed that the requirement that capital money be paid to at least two trustees has no application to money which has already been paid in advance of the relevant disposition or is left to be drawn down subsequently to that disposition. Since in either case, no capital money arises contemporaneously with the disposition, compliance with the ‘two trustee rule’ is not a statutory precondition of overreaching. In Peter Gibson LJ words, ‘if capital money does not arise, compliance does not arise’.
Sood’s case concerned overdraft mortgage. The bank advances no mortgage money contemporaneously with the charge, but provided a drawdown facility for the future. The Court of Appeal held that the requirement of the ‘two trustee rule’ applies only when capital money arises at the date of disposition of the legal estate. It can be seen that the court could not afford to jeopardise the protection which banks assume they have overdraft mortgages.
Effects of Overreaching
If the three statutory preconditions for overreaching are met, the disponee of trust land overreaches the beneficial interests behind the trust irrespective of whether he has notice of such entitlements.
Thus even a purchaser with express notice of adverse beneficial rights takes title free of them provided that there is compliance with the statutory preconditions of overreaching (City of London Building Society v Flegg [1988] as per Lord Oliver of Almerton).
Section 27(1) of the LPA 1925 provides clearly that the disponee who complies with the preconditions of overreaching shall not be concerned with the trusts affecting the land. In other words, the beneficial interests behind the trust now take effect conclusively in the capital money arising from the disposition. The disponee takes a good legal title free from all beneficial claims, and even does so irrespective of actual occupation by the claimant beneficiaries which would otherwise have founded an overriding interest (in registered land) or provided constructive notice (in unregistered land). (See: William & Glyn’s Bank Ltd v Boland [1981])
The disposition of a legal estate held on trust, when coupled with compliance with the preconditions for overreaching, sweeps the interests of trust beneficiaries off the land. The beneficiaries’ rights, although no longer capable of assertion against the disponee, nevertheless remain binding on and enforceable against the trustees, who now stand not as trustees of land but as trustees of the capital proceeds of the transaction.
Irrelevance of potentially overriding interests
The comprehensively overreaching character of a conveyance which complies with the preconditions set down in the LPA 1925 has seldom been in question. Nevertheless, the litigation in City of London Building Society v Flegg [1988] posed a serious challenge to the conventional understanding of overreaching and the machinery of Conveyancing. The Court of Appeal here decided that pursuant to the Land Registration Act, the simple association of beneficial entitlement and actual occupation always override a registered disposition irrespective of the number of registered proprietors. The Court of Appeal’s ruling was reinforced by reference to LPA 1925, s.14 [1986].
The ruling of the Court of Appeal in Flegg immediately threatened a number of extraordinary consequences. First, a disposition of title and receipt of capital money by two trustees for sale would no longer automatically overreach otherwise overriding interests in registered land and probably would not overreach the equivalent equitable interests in unregistered land either. Second, the Court of Appeal’s decision had the effect of ripping apart the ‘curtain’ which supposedly conceals trust equities from the purchaser who deals with two trustees. Third, the onus was placed on the purchaser to identify all beneficiaries in possession and ensure that each gave consent to the transaction in hand. In effect, as Lord Oliver of Aymerton later observed in the House of Lords, the Court of Appeal’s ruling was of ‘very considerable importance not only to conveyancers but to anyone proposing to lend upon the security of property.’
Much to the relief of conveyancers, the House of Lords unanimously overturned the ruling of the Court of Appeal as contrary to several structural tenets of LPA 1925. The House of Lords held that overriding status would attach only to such occupiers’ rights as affected the registered estate on the completion of the mortgage charge. In Flegg, however, the trustees’ receipt of the mortgage money had already overreached the beneficial interests of the respondents with the consequence that the respondents no longer retained any rights affecting the land which would rank as overriding interests. The mere fact of payment to the trustees had instantly ensured that the beneficiaries’ rights were shifted from the land to the capital moneys in the hands of the trustees with the result that the immunity conferred on the lender by the ‘two trustee rule’ was already in place. The beneficiaries’ critical right, that of occupation of the land, was dependent on and ‘co-terminous with’ its parent interest, with the result that once the ‘patent interest’ by which alone occupation could be justified, had been overreached, ‘nothing remains to which a right of occupation can attach.’
The ruling of the House of Lords in Flegg’s case conclusively reinstated an important part of the orthodoxy of English Land Law and has since been declared to be undisturbed by the enactment of the TOLATA 1996. In holding that a mortgage charge can overreach the beneficial rights of persons in ‘actual occupation’, the House of Lords significantly reinforced the principle that, in registered land, compliance with the ‘two trustee rule’ confers a statutory immunity even in respect of potentially overriding interests.
However, the outcome may be different if the registered estate is held in the name of a sole trustee of land and a disposition of that estate is executed by that trustee alone. Here, for want of the payment of capital money to land trustees, such a disposition attracts no statutory overreaching effect.
The possibility therefore remains – although the courts strive mightily to counteract this effect – that a beneficiary under a trust of this kind, if ‘in actual occupation’ of the land, may claim that his interest overrides the disposition (William & Glyn’s Bank Ltd v Boland [1981]. Lord Oliver of Aylmerton (Flegg’s case) thought it is essential part of the reasoning in Boland’s case that there had been a receipt of capital money by only one trustee. In Boland ‘it was a critical feature of the [wives] argument that their interests were not overreached but were kept alive as against the purchaser’
The principle of overreaching undoubtedly serves the simplification of Conveyancing, but the case law demonstrates some of the shortcomings of the mechanism. As Peter Gibson LJ observed in State Bank of India v Sood [1997], the safeguards for beneficiaries supposedly inherent in the ‘two trustee rule’ fall away when capital money does not arise contemporaneously with the disposition of the legal estate held on trust or is paid over to two dishonest trustees who act jointly in fraud of their beneficiaries.
However, the combined effect of the decisions in Williams & Glyn’s Bank Ltd v Boland [1981] and City of London Building Society v Flegg [1988] is in certain limited circumstances, to make the priority enjoyed by a beneficial owner depend on whether there is one trustee of land or two. Consistent with the modern drive towards the rationalisation of land dealings, the courts have progressively reinforced the statutory overreaching of beneficial trust interests in order to strip away, so far as possible, the obstacles to the reception of a clear title by transferees and chargees. In particular, the courts have been concerned to counter any suggestion that the arbitrary effects which flow from the composition of trusteeship amount to a discriminatory violation of the protection afforded by the ECtHR in respect of the ‘home’ and ‘family life’ and the ‘peaceful enjoyment’ of possession (Article 8, ECHR).
The combined effect of statute (LPA 1925) is therefore that the purchaser who fulfils the three preconditions for overreaching takes a legal title free of the beneficial interests, of the terms of the trust, and of any further responsibility for the capital money arising on the transaction.
Single Trustee Disposition
It has long been a working principle in the regime of registered land that, save in respect of overriding interests, a disponee is affected only by matters which are the subject of some entry in the register of title. This principle is perpetuated in section 26(1) and 26(2) of the Land Registration Act 2002, pursuant to which the title of the disponee of a registered estate or charge is declared to be undisturbed by any limitation on the disponer’s powers which was not reflected by some entry in the latter’s register of title or imposed by or under the 2002 Act itself.
The registered proprietor’s right to exercise owner’s powers is taken otherwise to be free from any limitation affecting the validity of a disposition. Subject to the stated exceptions, the disponee is, in effect, entitled to assume that the disponer had plenary powers of disposition.
Although non-compliance with the ‘two trustee rule’ is deeply contrary to the statutory scheme underpinning the trust of land, it is equally clear that the disponee from the sole trustee takes a good title at law.
It can be said that in reliance on section 26 LRA 2002, the disponee’s title is immune from being ‘questioned’ because any relevant limitation on the exercise of the owner’s powers, not being reflected by an entry in the register, stems from a source outside the LRA 2002, viz from the ‘two trustee rule’ imposed by the LPA 1925. Alternatively, it could also be argued that the disponee’s protection does not flow from section 26 at all. The breach of trust inherent in non-compliance with the ‘two trustee rule’ does not, in itself, threaten the validity of the disposition of the undoubted breach of trust. As Lord Browne-Wilkinson once observed, the mere fact ‘that a trustee acts in breach of trust does not mean that he has no capacity to do the act he wrongly did (Hammersmith and Fulham LBC v Monk [1992])
On either of these footings the wrongful transfer or charge executed by the sole trustee is left intact as a valid registered disposition of the legal estate in which case it takes its due effect according to the Law of Property Act 1925 and the Land Registration Act 2002. Thus, in some circumstances, the disponee, whilst taking a good legal title from a sole trustee of land, may take this title subject to beneficial interests existing behind the trust.
In similar terms a conveyance by trustees of land is not invalidated by reason of the mere fact that the trustees have contravened some statute (other than TOLATA 1996) or have contravened some ‘rule of law or equity’. Notwithstanding the impropriety, the purchaser takes a good legal title unless he had ‘actual notice’ of the contravention. The mere fact that the trustee’s disposition violated a rule of equity does not invalidate the transaction as a ‘conveyance’; and the effect of this ‘conveyance’ is simply left to be governed by the LPA 1925 and the ordinary rules of equity.
Thus a purchaser of land is entitled, in the absence of actual notice of any irregularity, to rely on a deed of discharge executed by the trustees on their conveyance of the trust land to ‘persons believed by them to be absolutely entitled beneficiaries of full age and capacity’. The purchaser is safe if he takes his conveyance from erstwhile trust beneficiaries whose trust has visibly terminated in a deed of discharge.
TOLATA 1996
TOLATA 1996 provides machinery for the resolution of a number of disputes which may emerge in relation to trusts of land. Application for a court order resolving any of these disputes may be made by any trustee of land or any person who has an interest in property subject to a trust of land. The court may, in general, make any order which it ‘thinks fit’ in relation to the exercise by the trustees of any of their functions or in order to declare the ‘nature or extent’ of any person’s interest in the trust land or its proceeds.
In determining the issues which call for resolution under TOLATA, the court is generally directed, by section 15(1) of the 1996 Act, to have regard to a range of considerations, including:
o The intentions of the person or persons who created the trust
o The purpose for which the property subject to the trust is held
o The welfare of any minor who occupies or might reasonably be expected to occupy the trust land as his home, and
o The interest of any secured creditors of any beneficiary.
These criteria are neither exhaustive nor weighted or ranked in any way but are matters to which the court must have regard in the exercise of its general discretion to make such order as it ‘thinks fit’.
In any application challenging the manner of the trustees’ exercise of their power to regulate the statutory ‘right to occupy’ enjoyed by trust beneficiaries, the court must also have regard to ‘the circumstances and wishes of each of the beneficiaries’ who would normally be entitled to occupy the land.
The court is given jurisdiction under section 14(1) & (2) of TOLATA 1996 to make such order as it ‘thinks fit’ in resolution of any dispute as to whether trust land should be sold or the land to be retained for occupation or other use by one or more of the trust beneficiaries. The Civil Partnership Bill 2004 also empowers the court, at its discretion, to order a sale of property on the application of one partner in a civil partnership.
It is inherent in most circumstances of disputed sale that all parties are probably reacting entirely reasonably in expressing a vigorous preference either for sale or for retention of the trust land. Recourse must therefore be had to the criteria specified by section 15 of the 1996 Act, which enables the court to address the specific needs and vulnerabilities present in the often complex world of trust relationships. In falls to the court to decide whose voice should be allowed in equity to prevail.
The purposes for which land is held on trust represent a significant, although not decisive, consideration in determining whether that land should be sold. Under s.30 LPA 1925, the courts developed a doctrine of ‘Collateral Purpose’ holding it to be generally wrong to order sale of the trust property if the original or collateral purpose which underlay the trust was still capable of substantial fulfilment (Jones v Challenger [1961]). Conversely, if the collateral purpose of a trust was no longer capable of fulfilment, the courts tended to sanction the proposed sale unless it was clearly inequitable to do so (Abbey National Plc v Moss [1994]).
In Stott v Ratcliffe (1982), the original purpose of a trust had been to provide a home for two elderly people during their joint lifetimes and thereafter for the surviving co-owner. On the death of one of the co-owner, the Court of Appeal declined to order sale at the behest of the personal representatives of the deceased tenant in common, the explicit object of the acquisition of the co-owned property having been to secure a home for the survivor. In Power v Brighton (1984 unreported), the Court of Appeal likewise declined to order a sale of property purchased for the purpose of providing a home for the new owner with the aid of money contributions from friends.
A trust of a family home is almost always founded upon the purpose of providing a base for joint residential occupation by family members. Accordingly, the courts have tended to refuse any order for sale while that purpose remains substantially capable of fulfilment, sale being sanctioned only where the underlying purpose has clearly been exhausted or frustrated (Jones v Challenger [1961]). Except in cases of insolvency, the court will rarely compel a sale of the family home so long as the relevant family members continue to live there in amity.
Welfare of Minors
The elements of trust purpose interacts heavily with another factor rendered relevant by TOLATA 1996. the existence of minor children of the family may well serve to prolong the trust purpose beyond the termination of the mutual relationship of the trustees or beneficiaries if the home is still required as accommodation for these children. This family-oriented perspective is reflected in the requirement contained in the 1996 Act, that the court must have regard to the welfare of any minor who occupies or might reasonably be expected to occupy any land subject to the trust as his home (s.15(1)(c) TOLATA 1996). In an early realisation of this aspect, Buckley LJ in Burke v Burke [1974] thought that the interests of children were only incidental to be taken into consideration … so far as they affect the equities in the matter as between the two persons entitled to the beneficial interests in the property. According to Buckley LJ, to treat the children’s father as being obliged to make provision for his children by agreeing to retain the property unsold was, to confuse with a problem relating to property considerations which are relevant to maintenance. However, in William (JW) v William (MA) [1976], Lord Denning was later to refer to Buckley LJ’s perspective as exemplifying ‘the old approach’ which was ‘now out-dated’.
The controlling relevance of this more utilitarian approach was classically foreshadowed in Re Evers’ Trust [1980]. Here a cohabiting couple had purchased a home in joint names largely with the aid of a joint mortgage loan. When the parties later separated, the woman and three children remained in the house. The Court of Appeal refused to endorse a sale which would have allowed the male partner to evict the woman and the children from their home. Ormrod LJ pointed out that the underlying purpose of the trust had been to provide a home for the couple and their three children ‘for the indefinite future’ and that this purpose was still capable of substantial fulfilment. Ormrod cited with approval the ‘modern view’ articulated by Lord Denning in William (JW) v William (MA) [1976] in which the courts ‘nowadays have great regard to the fact that the house is bought as a home in which the family is to be brought up.’ Similarly, in Browne v Pritchard [1975], Ormrod LJ enunciated that ‘Investment in a home is the least liquid investment that one can possibly make. It cannot be converted into cash while the children are at home and often not until one spouse dies unless it is possible to move into much smaller and cheaper accommodation’.
The specification of relevant criteria in section 15(1) is not exhaustive. In any particular case it is open to the court to have regard to other factors which legitimately bear upon the sale of the trust property. The fact that a court-ordered sale throws an increased strain upon already hard-pressed social housing stock may be a ground which influences the court to decline to order the sale of co-owned homes.
The tension between the use value and the exchange value of trust land takes on an even poignant character when the pressure towards a court-ordered sale of the land comes from external creditors who require that the land be sold in order to release funds for the discharge of debts incurred by the beneficiaries. In this respect the TOLATA 1996 draws an important distinction between the claims represented by a beneficiary’s trustee in bankruptcy and claims in circumstances which fall short of bankruptcy. As Hoffmann J observed in Re Citro (A Bankrupt) (1991), the resolution of this tension is ‘by no means an easy thing … The two interests are not in any sense commensurable. On the one hand, one has the financial interests of the Crown and on the other, one has personal and human interests of these two families.’
The balance to be struck between family and commercial interests in the context of insolvency was considered by a review committee chaired by Sir Kenneth Cork. This committee concluded that it would be ‘consonant with present social attitudes to alleviate the personal hardship of those who are dependent on the debtor but not responsible for his insolvency, if this can be achieved by delaying for an acceptable time the sale of the family home.
On the application for sale brought by a beneficiary’s trustee in bankruptcy, the court is directed by the Insolvency Act 1986 to make such order as it thinks just and reasonable, having regard to the interest of the bankrupt’s creditors and all the circumstances of the case other than the needs of the bankrupt. This judicial discretion is ultimately curtailed by an overriding statutory direction that, the court must assume that ‘the interests of the bankrupt’s creditors outweigh all other considerations’.
Any matrimonial home rights under the Family Law Act 1996 which the spouse may have acquired prior to the bankruptcy are expressly declared to subsist notwithstanding the bankruptcy. This rights are terminable only by court order and, in deciding such an issue, the court must make such order … as it thinks just and reasonable, having regard to the interests of the creditors, the spouse’s conduct, her needs and financial resources, the needs of any children, and all the circumstances of the case other than the needs of the bankrupt (s.336(4) Insolvency Act 1986). As Lord Bingham LJ observed in Re Citro (A Bankrupt) [1991], sale must be ordered ‘unless there are, at least, compelling reasons, not found in the ordinary run of cases, for refusing it.’
In Claughton v Charalambous [1999], it was thought that the severe ill-health and immobility of the bankrupt’s wife, coupled with her special housing needs and reduced life expectancy, amounted to ‘exceptional circumstances justifying the indefinite suspension of an order for sale of her home. In Re Bremmer [1999], sale was postponed until three months after the death of the bankrupt, who was terminally ill.
Exceptional circumstances were also found in Re Holiday [1981] where the Court of Appeal declined to order an immediate sale of a former matrimonial home in which the bankrupt’s ex-wife was still living with three young children. The court found that postponed payment was highly unlikely to cause great hardship to any of the creditors and thus deferred sale for five years. The decision in Re Holiday was regarded as a ‘high water-mark for the protection of the wife and children’ (Harman v Glencross [1986] and Re Lowrie [1981]).
Nourse LJ in Re Citro declined to accept as ‘exceptional circumstances’ the fact that a court-ordered sale would cause difficulties with children’s schooling and result in the eviction of a wife with young children … in circumstances where the realisation of her beneficial interest will not produce enough to buy a comparable home in the same neighbourhood, or indeed elsewhere.
It was one of the original purpose of the Insolvency Act 1986 to bring about a better and more compassionate balance in the consideration of competing interests in the family home on bankruptcy, in particular the statutory compromise was aimed at establishing a legal mechanism which would delay rather than cancel the rights of creditors. In reality, it appears that the limiting statutory formulae, coupled with strict construction by the courts, have produced a substantial continuity with the bankruptcy case law rather than a quantum step into a new jurisprudence of insolvency.
However, Neuberger J in Mortgage Corporation v Shaire [2001] pointed out that, section 15(1) of TOLATA 1996 expressly specifies the interests of secured creditors as ranking alongside, and having no automatic priority over, such factors as ‘the welfare of any minor’. Neuberger J noted that there had been indications of judicial dissatisfaction with the predisposition towards sale and that nothing in the 1996 Act replicated the bias towards sale implicit in the now obsolete trust for sale. Against this background, Neuberger J thought it ‘not … unlikely that the legislature intended to relax the fetters’ on the court’s exercise of discretion in cases other than bankruptcy ‘so as to tip the balance somewhat more in favour of families and against banks and other chargees. In the light of this perceived change in the law, Neuberger J declined to order an immediate sale of a family home on the application of a chargee where it remained possible that a trust beneficiary, whose signature on the charge had been forged, might be able to service the interest payments on the outstanding debt.
Recent case law has indicated that the courts remain strongly influenced by the argument that, unless an order for sale is made, the bank will be kept waiting indefinitely for any payment out of what is, for all practical purposes, its own share of the property. Nor has the courts allowed this concern for the lender’s commercial interests to be deflected by reference to the principle of respect for private and family life and for the home enshrined in Article 8 of the ECHR. Indeed, the major thrust of the House of Lords’ majority ruling in Harrow London Borough Council v Qazi [2004] is the insistence that Article 8 is not violated by the simple enforcement of entitlements which have been determined to belong to parties as a matter of private domestic law.
Thus, even though a family home may still be required for the bankrupt’s family, applications for sale are highly unlikely to be declined under the Insolvency Act 1986 on the sheer ground of collateral damage to the family casualties of financial misfortune.
Before the disponee of a legal estate held on trust can properly claim to have overreached, or taken title free of, the interests of beneficiaries under that trust, he must show that the statutory preconditions for overreaching have been satisfied.
Section 2(1)(ii) of the Law of Property Act 1925 provides that:
A conveyance to a purchaser of a legal estate in land shall overreach any equitable interest or power affecting that estate, whether or not he has notice thereof, if … the conveyance is made by the trustees of land and the equitable interest or power is at the date of the conveyance capable of being overreached by such trustees … and the requirements of section 27 of this Act respecting the payment of capital money arising on such a conveyance are complied with …
1. Two Trustee Rule
It is vital precondition of overreaching under section 2(1)(ii) of LPA 1925 that the disponee must comply with the requirements of section 27 of this Act respecting the payment of capital money. Under this provision the proceeds of sale shall not be applied by the direction of fewer than two persons as trustees. This two trustee rule is a principle of stern application.
The insistence on strict observance of the two trustee rule marks a pragmatic recognition that a payment made to two trustees of land is much less likely to be misappropriated or misapplied than a payment made to a single individual.
2. Payment to Trust Corporation
Statute allows overreaching to occur where payment has been made to a trust corporation - LPA 1925, s.27(2)
3. Payment to a sole personal representative
The ‘two trustee rule’ does not affect the right of a sole personal representative to give a valid receipt for, or direct the application of, proceeds of sale or other capital money.
Absence of Capital Money on Disposition
A mere failure to pay capital money to two trustees of land cannot, in itself, prevent overreaching of trust interests if no capital money actually arises on the disposition of the legal estate by the trustees (example in the case of an exchange of land). This third category exception to the otherwise stringent ‘two trustee rule’ is beginning to gather importance.
In State Bank of India v Sood [1997], the Court of Appeal confirmed that the requirement that capital money be paid to at least two trustees has no application to money which has already been paid in advance of the relevant disposition or is left to be drawn down subsequently to that disposition. Since in either case, no capital money arises contemporaneously with the disposition, compliance with the ‘two trustee rule’ is not a statutory precondition of overreaching. In Peter Gibson LJ words, ‘if capital money does not arise, compliance does not arise’.
Sood’s case concerned overdraft mortgage. The bank advances no mortgage money contemporaneously with the charge, but provided a drawdown facility for the future. The Court of Appeal held that the requirement of the ‘two trustee rule’ applies only when capital money arises at the date of disposition of the legal estate. It can be seen that the court could not afford to jeopardise the protection which banks assume they have overdraft mortgages.
Effects of Overreaching
If the three statutory preconditions for overreaching are met, the disponee of trust land overreaches the beneficial interests behind the trust irrespective of whether he has notice of such entitlements.
Thus even a purchaser with express notice of adverse beneficial rights takes title free of them provided that there is compliance with the statutory preconditions of overreaching (City of London Building Society v Flegg [1988] as per Lord Oliver of Almerton).
Section 27(1) of the LPA 1925 provides clearly that the disponee who complies with the preconditions of overreaching shall not be concerned with the trusts affecting the land. In other words, the beneficial interests behind the trust now take effect conclusively in the capital money arising from the disposition. The disponee takes a good legal title free from all beneficial claims, and even does so irrespective of actual occupation by the claimant beneficiaries which would otherwise have founded an overriding interest (in registered land) or provided constructive notice (in unregistered land). (See: William & Glyn’s Bank Ltd v Boland [1981])
The disposition of a legal estate held on trust, when coupled with compliance with the preconditions for overreaching, sweeps the interests of trust beneficiaries off the land. The beneficiaries’ rights, although no longer capable of assertion against the disponee, nevertheless remain binding on and enforceable against the trustees, who now stand not as trustees of land but as trustees of the capital proceeds of the transaction.
Irrelevance of potentially overriding interests
The comprehensively overreaching character of a conveyance which complies with the preconditions set down in the LPA 1925 has seldom been in question. Nevertheless, the litigation in City of London Building Society v Flegg [1988] posed a serious challenge to the conventional understanding of overreaching and the machinery of Conveyancing. The Court of Appeal here decided that pursuant to the Land Registration Act, the simple association of beneficial entitlement and actual occupation always override a registered disposition irrespective of the number of registered proprietors. The Court of Appeal’s ruling was reinforced by reference to LPA 1925, s.14 [1986].
The ruling of the Court of Appeal in Flegg immediately threatened a number of extraordinary consequences. First, a disposition of title and receipt of capital money by two trustees for sale would no longer automatically overreach otherwise overriding interests in registered land and probably would not overreach the equivalent equitable interests in unregistered land either. Second, the Court of Appeal’s decision had the effect of ripping apart the ‘curtain’ which supposedly conceals trust equities from the purchaser who deals with two trustees. Third, the onus was placed on the purchaser to identify all beneficiaries in possession and ensure that each gave consent to the transaction in hand. In effect, as Lord Oliver of Aymerton later observed in the House of Lords, the Court of Appeal’s ruling was of ‘very considerable importance not only to conveyancers but to anyone proposing to lend upon the security of property.’
Much to the relief of conveyancers, the House of Lords unanimously overturned the ruling of the Court of Appeal as contrary to several structural tenets of LPA 1925. The House of Lords held that overriding status would attach only to such occupiers’ rights as affected the registered estate on the completion of the mortgage charge. In Flegg, however, the trustees’ receipt of the mortgage money had already overreached the beneficial interests of the respondents with the consequence that the respondents no longer retained any rights affecting the land which would rank as overriding interests. The mere fact of payment to the trustees had instantly ensured that the beneficiaries’ rights were shifted from the land to the capital moneys in the hands of the trustees with the result that the immunity conferred on the lender by the ‘two trustee rule’ was already in place. The beneficiaries’ critical right, that of occupation of the land, was dependent on and ‘co-terminous with’ its parent interest, with the result that once the ‘patent interest’ by which alone occupation could be justified, had been overreached, ‘nothing remains to which a right of occupation can attach.’
The ruling of the House of Lords in Flegg’s case conclusively reinstated an important part of the orthodoxy of English Land Law and has since been declared to be undisturbed by the enactment of the TOLATA 1996. In holding that a mortgage charge can overreach the beneficial rights of persons in ‘actual occupation’, the House of Lords significantly reinforced the principle that, in registered land, compliance with the ‘two trustee rule’ confers a statutory immunity even in respect of potentially overriding interests.
However, the outcome may be different if the registered estate is held in the name of a sole trustee of land and a disposition of that estate is executed by that trustee alone. Here, for want of the payment of capital money to land trustees, such a disposition attracts no statutory overreaching effect.
The possibility therefore remains – although the courts strive mightily to counteract this effect – that a beneficiary under a trust of this kind, if ‘in actual occupation’ of the land, may claim that his interest overrides the disposition (William & Glyn’s Bank Ltd v Boland [1981]. Lord Oliver of Aylmerton (Flegg’s case) thought it is essential part of the reasoning in Boland’s case that there had been a receipt of capital money by only one trustee. In Boland ‘it was a critical feature of the [wives] argument that their interests were not overreached but were kept alive as against the purchaser’
The principle of overreaching undoubtedly serves the simplification of Conveyancing, but the case law demonstrates some of the shortcomings of the mechanism. As Peter Gibson LJ observed in State Bank of India v Sood [1997], the safeguards for beneficiaries supposedly inherent in the ‘two trustee rule’ fall away when capital money does not arise contemporaneously with the disposition of the legal estate held on trust or is paid over to two dishonest trustees who act jointly in fraud of their beneficiaries.
However, the combined effect of the decisions in Williams & Glyn’s Bank Ltd v Boland [1981] and City of London Building Society v Flegg [1988] is in certain limited circumstances, to make the priority enjoyed by a beneficial owner depend on whether there is one trustee of land or two. Consistent with the modern drive towards the rationalisation of land dealings, the courts have progressively reinforced the statutory overreaching of beneficial trust interests in order to strip away, so far as possible, the obstacles to the reception of a clear title by transferees and chargees. In particular, the courts have been concerned to counter any suggestion that the arbitrary effects which flow from the composition of trusteeship amount to a discriminatory violation of the protection afforded by the ECtHR in respect of the ‘home’ and ‘family life’ and the ‘peaceful enjoyment’ of possession (Article 8, ECHR).
The combined effect of statute (LPA 1925) is therefore that the purchaser who fulfils the three preconditions for overreaching takes a legal title free of the beneficial interests, of the terms of the trust, and of any further responsibility for the capital money arising on the transaction.
Single Trustee Disposition
It has long been a working principle in the regime of registered land that, save in respect of overriding interests, a disponee is affected only by matters which are the subject of some entry in the register of title. This principle is perpetuated in section 26(1) and 26(2) of the Land Registration Act 2002, pursuant to which the title of the disponee of a registered estate or charge is declared to be undisturbed by any limitation on the disponer’s powers which was not reflected by some entry in the latter’s register of title or imposed by or under the 2002 Act itself.
The registered proprietor’s right to exercise owner’s powers is taken otherwise to be free from any limitation affecting the validity of a disposition. Subject to the stated exceptions, the disponee is, in effect, entitled to assume that the disponer had plenary powers of disposition.
Although non-compliance with the ‘two trustee rule’ is deeply contrary to the statutory scheme underpinning the trust of land, it is equally clear that the disponee from the sole trustee takes a good title at law.
It can be said that in reliance on section 26 LRA 2002, the disponee’s title is immune from being ‘questioned’ because any relevant limitation on the exercise of the owner’s powers, not being reflected by an entry in the register, stems from a source outside the LRA 2002, viz from the ‘two trustee rule’ imposed by the LPA 1925. Alternatively, it could also be argued that the disponee’s protection does not flow from section 26 at all. The breach of trust inherent in non-compliance with the ‘two trustee rule’ does not, in itself, threaten the validity of the disposition of the undoubted breach of trust. As Lord Browne-Wilkinson once observed, the mere fact ‘that a trustee acts in breach of trust does not mean that he has no capacity to do the act he wrongly did (Hammersmith and Fulham LBC v Monk [1992])
On either of these footings the wrongful transfer or charge executed by the sole trustee is left intact as a valid registered disposition of the legal estate in which case it takes its due effect according to the Law of Property Act 1925 and the Land Registration Act 2002. Thus, in some circumstances, the disponee, whilst taking a good legal title from a sole trustee of land, may take this title subject to beneficial interests existing behind the trust.
In similar terms a conveyance by trustees of land is not invalidated by reason of the mere fact that the trustees have contravened some statute (other than TOLATA 1996) or have contravened some ‘rule of law or equity’. Notwithstanding the impropriety, the purchaser takes a good legal title unless he had ‘actual notice’ of the contravention. The mere fact that the trustee’s disposition violated a rule of equity does not invalidate the transaction as a ‘conveyance’; and the effect of this ‘conveyance’ is simply left to be governed by the LPA 1925 and the ordinary rules of equity.
Thus a purchaser of land is entitled, in the absence of actual notice of any irregularity, to rely on a deed of discharge executed by the trustees on their conveyance of the trust land to ‘persons believed by them to be absolutely entitled beneficiaries of full age and capacity’. The purchaser is safe if he takes his conveyance from erstwhile trust beneficiaries whose trust has visibly terminated in a deed of discharge.
TOLATA 1996
TOLATA 1996 provides machinery for the resolution of a number of disputes which may emerge in relation to trusts of land. Application for a court order resolving any of these disputes may be made by any trustee of land or any person who has an interest in property subject to a trust of land. The court may, in general, make any order which it ‘thinks fit’ in relation to the exercise by the trustees of any of their functions or in order to declare the ‘nature or extent’ of any person’s interest in the trust land or its proceeds.
In determining the issues which call for resolution under TOLATA, the court is generally directed, by section 15(1) of the 1996 Act, to have regard to a range of considerations, including:
o The intentions of the person or persons who created the trust
o The purpose for which the property subject to the trust is held
o The welfare of any minor who occupies or might reasonably be expected to occupy the trust land as his home, and
o The interest of any secured creditors of any beneficiary.
These criteria are neither exhaustive nor weighted or ranked in any way but are matters to which the court must have regard in the exercise of its general discretion to make such order as it ‘thinks fit’.
In any application challenging the manner of the trustees’ exercise of their power to regulate the statutory ‘right to occupy’ enjoyed by trust beneficiaries, the court must also have regard to ‘the circumstances and wishes of each of the beneficiaries’ who would normally be entitled to occupy the land.
The court is given jurisdiction under section 14(1) & (2) of TOLATA 1996 to make such order as it ‘thinks fit’ in resolution of any dispute as to whether trust land should be sold or the land to be retained for occupation or other use by one or more of the trust beneficiaries. The Civil Partnership Bill 2004 also empowers the court, at its discretion, to order a sale of property on the application of one partner in a civil partnership.
It is inherent in most circumstances of disputed sale that all parties are probably reacting entirely reasonably in expressing a vigorous preference either for sale or for retention of the trust land. Recourse must therefore be had to the criteria specified by section 15 of the 1996 Act, which enables the court to address the specific needs and vulnerabilities present in the often complex world of trust relationships. In falls to the court to decide whose voice should be allowed in equity to prevail.
The purposes for which land is held on trust represent a significant, although not decisive, consideration in determining whether that land should be sold. Under s.30 LPA 1925, the courts developed a doctrine of ‘Collateral Purpose’ holding it to be generally wrong to order sale of the trust property if the original or collateral purpose which underlay the trust was still capable of substantial fulfilment (Jones v Challenger [1961]). Conversely, if the collateral purpose of a trust was no longer capable of fulfilment, the courts tended to sanction the proposed sale unless it was clearly inequitable to do so (Abbey National Plc v Moss [1994]).
In Stott v Ratcliffe (1982), the original purpose of a trust had been to provide a home for two elderly people during their joint lifetimes and thereafter for the surviving co-owner. On the death of one of the co-owner, the Court of Appeal declined to order sale at the behest of the personal representatives of the deceased tenant in common, the explicit object of the acquisition of the co-owned property having been to secure a home for the survivor. In Power v Brighton (1984 unreported), the Court of Appeal likewise declined to order a sale of property purchased for the purpose of providing a home for the new owner with the aid of money contributions from friends.
A trust of a family home is almost always founded upon the purpose of providing a base for joint residential occupation by family members. Accordingly, the courts have tended to refuse any order for sale while that purpose remains substantially capable of fulfilment, sale being sanctioned only where the underlying purpose has clearly been exhausted or frustrated (Jones v Challenger [1961]). Except in cases of insolvency, the court will rarely compel a sale of the family home so long as the relevant family members continue to live there in amity.
Welfare of Minors
The elements of trust purpose interacts heavily with another factor rendered relevant by TOLATA 1996. the existence of minor children of the family may well serve to prolong the trust purpose beyond the termination of the mutual relationship of the trustees or beneficiaries if the home is still required as accommodation for these children. This family-oriented perspective is reflected in the requirement contained in the 1996 Act, that the court must have regard to the welfare of any minor who occupies or might reasonably be expected to occupy any land subject to the trust as his home (s.15(1)(c) TOLATA 1996). In an early realisation of this aspect, Buckley LJ in Burke v Burke [1974] thought that the interests of children were only incidental to be taken into consideration … so far as they affect the equities in the matter as between the two persons entitled to the beneficial interests in the property. According to Buckley LJ, to treat the children’s father as being obliged to make provision for his children by agreeing to retain the property unsold was, to confuse with a problem relating to property considerations which are relevant to maintenance. However, in William (JW) v William (MA) [1976], Lord Denning was later to refer to Buckley LJ’s perspective as exemplifying ‘the old approach’ which was ‘now out-dated’.
The controlling relevance of this more utilitarian approach was classically foreshadowed in Re Evers’ Trust [1980]. Here a cohabiting couple had purchased a home in joint names largely with the aid of a joint mortgage loan. When the parties later separated, the woman and three children remained in the house. The Court of Appeal refused to endorse a sale which would have allowed the male partner to evict the woman and the children from their home. Ormrod LJ pointed out that the underlying purpose of the trust had been to provide a home for the couple and their three children ‘for the indefinite future’ and that this purpose was still capable of substantial fulfilment. Ormrod cited with approval the ‘modern view’ articulated by Lord Denning in William (JW) v William (MA) [1976] in which the courts ‘nowadays have great regard to the fact that the house is bought as a home in which the family is to be brought up.’ Similarly, in Browne v Pritchard [1975], Ormrod LJ enunciated that ‘Investment in a home is the least liquid investment that one can possibly make. It cannot be converted into cash while the children are at home and often not until one spouse dies unless it is possible to move into much smaller and cheaper accommodation’.
The specification of relevant criteria in section 15(1) is not exhaustive. In any particular case it is open to the court to have regard to other factors which legitimately bear upon the sale of the trust property. The fact that a court-ordered sale throws an increased strain upon already hard-pressed social housing stock may be a ground which influences the court to decline to order the sale of co-owned homes.
The tension between the use value and the exchange value of trust land takes on an even poignant character when the pressure towards a court-ordered sale of the land comes from external creditors who require that the land be sold in order to release funds for the discharge of debts incurred by the beneficiaries. In this respect the TOLATA 1996 draws an important distinction between the claims represented by a beneficiary’s trustee in bankruptcy and claims in circumstances which fall short of bankruptcy. As Hoffmann J observed in Re Citro (A Bankrupt) (1991), the resolution of this tension is ‘by no means an easy thing … The two interests are not in any sense commensurable. On the one hand, one has the financial interests of the Crown and on the other, one has personal and human interests of these two families.’
The balance to be struck between family and commercial interests in the context of insolvency was considered by a review committee chaired by Sir Kenneth Cork. This committee concluded that it would be ‘consonant with present social attitudes to alleviate the personal hardship of those who are dependent on the debtor but not responsible for his insolvency, if this can be achieved by delaying for an acceptable time the sale of the family home.
On the application for sale brought by a beneficiary’s trustee in bankruptcy, the court is directed by the Insolvency Act 1986 to make such order as it thinks just and reasonable, having regard to the interest of the bankrupt’s creditors and all the circumstances of the case other than the needs of the bankrupt. This judicial discretion is ultimately curtailed by an overriding statutory direction that, the court must assume that ‘the interests of the bankrupt’s creditors outweigh all other considerations’.
Any matrimonial home rights under the Family Law Act 1996 which the spouse may have acquired prior to the bankruptcy are expressly declared to subsist notwithstanding the bankruptcy. This rights are terminable only by court order and, in deciding such an issue, the court must make such order … as it thinks just and reasonable, having regard to the interests of the creditors, the spouse’s conduct, her needs and financial resources, the needs of any children, and all the circumstances of the case other than the needs of the bankrupt (s.336(4) Insolvency Act 1986). As Lord Bingham LJ observed in Re Citro (A Bankrupt) [1991], sale must be ordered ‘unless there are, at least, compelling reasons, not found in the ordinary run of cases, for refusing it.’
In Claughton v Charalambous [1999], it was thought that the severe ill-health and immobility of the bankrupt’s wife, coupled with her special housing needs and reduced life expectancy, amounted to ‘exceptional circumstances justifying the indefinite suspension of an order for sale of her home. In Re Bremmer [1999], sale was postponed until three months after the death of the bankrupt, who was terminally ill.
Exceptional circumstances were also found in Re Holiday [1981] where the Court of Appeal declined to order an immediate sale of a former matrimonial home in which the bankrupt’s ex-wife was still living with three young children. The court found that postponed payment was highly unlikely to cause great hardship to any of the creditors and thus deferred sale for five years. The decision in Re Holiday was regarded as a ‘high water-mark for the protection of the wife and children’ (Harman v Glencross [1986] and Re Lowrie [1981]).
Nourse LJ in Re Citro declined to accept as ‘exceptional circumstances’ the fact that a court-ordered sale would cause difficulties with children’s schooling and result in the eviction of a wife with young children … in circumstances where the realisation of her beneficial interest will not produce enough to buy a comparable home in the same neighbourhood, or indeed elsewhere.
It was one of the original purpose of the Insolvency Act 1986 to bring about a better and more compassionate balance in the consideration of competing interests in the family home on bankruptcy, in particular the statutory compromise was aimed at establishing a legal mechanism which would delay rather than cancel the rights of creditors. In reality, it appears that the limiting statutory formulae, coupled with strict construction by the courts, have produced a substantial continuity with the bankruptcy case law rather than a quantum step into a new jurisprudence of insolvency.
However, Neuberger J in Mortgage Corporation v Shaire [2001] pointed out that, section 15(1) of TOLATA 1996 expressly specifies the interests of secured creditors as ranking alongside, and having no automatic priority over, such factors as ‘the welfare of any minor’. Neuberger J noted that there had been indications of judicial dissatisfaction with the predisposition towards sale and that nothing in the 1996 Act replicated the bias towards sale implicit in the now obsolete trust for sale. Against this background, Neuberger J thought it ‘not … unlikely that the legislature intended to relax the fetters’ on the court’s exercise of discretion in cases other than bankruptcy ‘so as to tip the balance somewhat more in favour of families and against banks and other chargees. In the light of this perceived change in the law, Neuberger J declined to order an immediate sale of a family home on the application of a chargee where it remained possible that a trust beneficiary, whose signature on the charge had been forged, might be able to service the interest payments on the outstanding debt.
Recent case law has indicated that the courts remain strongly influenced by the argument that, unless an order for sale is made, the bank will be kept waiting indefinitely for any payment out of what is, for all practical purposes, its own share of the property. Nor has the courts allowed this concern for the lender’s commercial interests to be deflected by reference to the principle of respect for private and family life and for the home enshrined in Article 8 of the ECHR. Indeed, the major thrust of the House of Lords’ majority ruling in Harrow London Borough Council v Qazi [2004] is the insistence that Article 8 is not violated by the simple enforcement of entitlements which have been determined to belong to parties as a matter of private domestic law.
Thus, even though a family home may still be required for the bankrupt’s family, applications for sale are highly unlikely to be declined under the Insolvency Act 1986 on the sheer ground of collateral damage to the family casualties of financial misfortune.
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