4.

6 Overreaching
There are two ways of describing overreaching: 1) It is the process by which interests in land are transferred to the proceeds of sale of the land when the legal title is sold to a purchaser, so that the purchaser takes free from the interest and the equitable interest holder acquires instead an equivalent interest in the proceeds of sale now held by the seller. 2) In State Bank of India v. Sood, Peter Gibson LJ said: that overreaching is merely a process by which pre-existing interests are subordinate to later interests created by dispositions made under a trust. In other words, on this view, contrary to Cherrys view, overreaching is just a means of extinguishing pre-existing interests on a disposition to a purchaser. Operation of overreaching: Provision for trustees of land to overreach equitable interests generally is made by section 2 (1) of the LPA(1925). A conveyance includes the grant of a mortgage or a lease as well as the transfers of a fee simple. Section 2(1) refers to equitable interests in general but section 2 (2) and (3) then effectively cut the category of equitable interests that can be overreached down to beneficial interests under trusts, by excluding commercial equitable interests such as restrictive covenants, easements, estate contracts and options to purchase. The general effect if section 2 (1) is therefore that, when trustees of land sell or mortgage trust land, the interests of the beneficiaries will be overreached and not be enforceable against the purchaser of mortgagee, provided the capital money is paid to at least two trustees or a trust corporation. Problem - Overreaching the interests of occupying beneficiaries: The real problem arises when there are two trustees but they are not also, or not the only, beneficiaries in occupation of the property. In these cases, although as a matter of trust law they should consult the occupying beneficiaries before selling the property, any disposition they make will overreach the beneficiaries interest whether they do so or not. Problem - Transaction capable of overreaching beneficiaries interest: If a sale or mortgage of trust land by trustees which involves no immediate capital payment by the purchaser/mortgagee to the trustees nevertheless overreaches the beneficial interest under the trust, overreaching means no more than extinguishing and affords the beneficiaries no protection whatsoever. If it is not immediately clear to purchasers on the face of the transaction whether it is one that will overreach beneficial interests, their only safe course is to enquire into the details of the trust in all cases, which was precisely what the 1925 legislation was seeking to avoid.

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Law Commission, Transfer of Land: Overreaching: Beneficiaries in Occupation (Law Commission Report No. 188, 1989) It is an established, flexible and convenient feature of English land law that property can be legally owned by trustees who hold it on behalf of one or more beneficiaries. The fact that the law can accommodate many different and separate ownership interests in the same property, whether they are concurrent or consecutive, gives owners the chance to deal with their property in almost any way they choose. A purchaser needs to be assured that he is acquiring the whole of the interest for which he contracted. If that interest had been fragmented, proving title can be complicated, costly and time-consuming. At the same time, as the incidence of ownership by more than one person has increased, the concept of equitable interests arising informally has been developed. So where two people contribute to the purchase price of the property which is then conveyed into the name of only one of them, both contributors are equitable tenants in common. Overreaching: The principle of overreaching is which by equitable interests such as the interest of the beneficiaries under trusts are kept off the title to the legal estate, and are overreached on the sale of the legal estate to a purchaser who accordingly takes free of them. Safeguard for beneficiaries: The requirement to pay capital money to two trustees or a trust corporation was newly introduced by the 1925 legislation. The safeguard against mistake or fraud of having at least two trustees or a trust corporation where capital money falls to be received, is fairly obvious reform; it became essential when additional powers....to overreach equitable interests were conferred. NEED FOR REFORM Change of circumstances: The 1925 legislation compromises between the need to protect beneficiaries under trusts of land and the demand for certainty and simplicity in conveyancing was satisfactory, and perhaps ideal, in the circumstances in which it was intended to operate. The financial interest of the beneficiary was safeguarded by transferring his claim to the proceeds of sale. Protecting occupation of property: Firstly, the exclusively financial protection given by the 1925 legislation is no longer appropriate for occupiers of their own homes; their real concern is often with the enjoyment of the property itself which will be lost after overreaching. Secondly, as the general understanding of many of the beneficiaries with whom we are concerned is that they are joint owners, they should have appropriate ownership rights.

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 Thirdly, it is unsatisfactory that the consequences which a sale visits upon a beneficiary in occupation are different depending whether the legal estate happens to have been vested in one, or in more than one, person. Fourthly, it is difficult to defend the situation in which someone not married to the legal owner in actual occupation of their home, and in which they own a share, has less right to remain there than a husband or where without any such ownership interest. Another reform option would be to require beneficiaries, who wanted to be consulted before the property was disposed of, to register their interest. REFORM PROPOSALS Principle recommendation: A conveyance of a legal estate in property should not have the effect of overreaching the interest of anyone of full age and capacity who is entitled to a beneficial interest in the property and who has a right to occupy it and is in actual occupation of it at the date of the conveyance, unless that person consents.

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City of London Building Society v Flegg [1988] AC 54

LORD TEMPLEMAN. My Lords, the appellants, City of London Building Society, are the mortgagees under a charge by way of legal mortgage of registered land held at the date of the charge by two trustees upon trust for sale and to stand possessed of the net proceeds of sale and rents and profits until sale upon trust for four tenants in common including the respondents, Mr. and Mrs. Flegg. The legal charge was entered into by the trustees in breach of trust, although the appellants were unaware of this. The respondents who were in actual occupation of the mortgaged land claim that the appellants' legal charge is subject to the respondents' overriding interest. The Court of Appeal declined to order the respondents to deliver up possession of the land to the appellants; hence this appeal.

By a conveyance dated 18 October 1977 the land appropriately named Bleak House was conveyed to Mr. and Mrs. Maxwell-Brown in fee simple upon trust for sale [the form of trust under which jointly owned land was held until 1995: the trust for sale was abolished and replaced by the trust of land by the Trusts of Land and Appointment of Trustees Act 1995] for the Maxwell-Browns as joint tenants. In fact, the purchase price paid by the Maxwell-Browns for Bleak House, amounting to 34,000, had been provided as to 18,000 or more by the respondents who were the parents of Mrs. Maxwell-Brown. In consequence and notwithstanding the express trusts set out in the conveyance, Bleak House was held by the Maxwell-Browns on trust for . . . the Maxwell-Browns and the respondents as tenants in common in the proportions in which they had respectively contributed to the purchase price. The respondents were entitled to occupy Bleak House together with the Maxwell-Browns as tenants in common under the trust for sale and all four beneficiaries duly went into occupation.

By a legal charge by way of mortgage dated 8 January 1982 the Maxwell-Browns charged Bleak House to secure 37,500 advanced by the appellants to the Maxwell-Browns. The respondents knew nothing of the legal charge which was granted by the Maxwell-Browns for their own purposes and in breach of trust. The appellants knew nothing of the respondents.

[He read through the statutory provisions governing overreaching] Thus the appellants advancing money in good faith to two trustees for sale on the security of a charge by way of legal mortgage of Bleak House were not concerned with the trusts affecting the proceeds of sale of Bleak House or with the propriety of the trustees entering into the legal charge. As a result of the legal charge the interests of the beneficiaries in Bleak House pending sale were transferred to the equity of redemption vested in the Maxwell-Browns and to the sum of 37,500 received by the Maxwell-Browns from the appellants in consideration for the grant of the legal charge. The Maxwell-Browns did not account to the respondents for any part of the sum of 37,500 and defaulted in the performance of their obligations to the appellants under the legal charge. The appellants seek possession of Bleak House with a view to enforcing its security.

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The respondents resist the claim of the appellants to possession of Bleak House and rely on section 14 of the Law of Property Act 1925. Sections 27 and 28 of that Act which overreach the interests of the respondents under the trust for sale of Bleak House are to be found in Part I of the Act. Section 14 provides: "This Part of this Act shall not prejudicially affect the interest of any person in possession or in actual occupation of land to which he may be entitled in right of such possession or occupation."

The respondents were in actual occupation of Bleak House at the date of the legal charge. It is argued that their beneficial interests under the trust for sale were not overreached by the legal charge or that the respondents were entitled to remain in occupation after the legal charge and against the appellants despite the overreaching of their interests.

My Lords, the respondents were entitled to occupy Bleak House by virtue of their beneficial interests in Bleak House . . . Their beneficial interests were overreached by the legal charge and were transferred to the equity of redemption held by the Maxwell-Browns and to the sum advanced by the appellants in consideration of the grant of the legal charge and received by the Maxwell-Browns. After the legal charge the respondents were only entitled to continue in occupation of Bleak House by virtue of their beneficial interests in the equity of redemption of Bleak House and that equity of redemption is subject to the right of the appellants as mortgagee to take possession. Sections 27 and 28 did not "prejudicially" affect the interests of the respondents who were indeed prejudiced but by the subsequent failure of the trustees for sale to account to their beneficiaries for capital money received by the trustees. A beneficiary who is entitled to share in the proceeds of sale of land held on trust for sale relies on the trustees. Section 26(3) of the Act (as amended) requires trustees for sale to consult their beneficiaries and to give effect to the wishes of the majority of the beneficiaries "but a purchaser shall not be concerned to see that the provisions of this subsection have been complied with." If the argument for the respondents is correct, a purchaser from trustees for sale must ensure that a beneficiary in actual occupation is not only consulted but consents to the sale. Section 14 of the Law of Property Act 1925 is not apt to confer on a tenant in common of land held on trust for sale, who happens to be in occupation, rights which are different from and superior to the rights of tenants in common, who are not in occupation on the date when the interests of all tenants in common are overreached by a sale or mortgage by trustees for sale. . . . One of the main objects of the legislation of 1925 was to effect a compromise between on the one hand the interests of the public in securing that land held in trust is freely marketable and, on the other hand, the interests of the beneficiaries in preserving their rights under the trusts. . . . By the Law of Property Act 1925 trustees for sale may convey land held on trust for sale discharged from the trusts affecting the proceeds of sale and rents and profits until sale. Under [this form] of trust the protection and the only protection of the beneficiaries is that capital money must be paid to at least two trustees or a trust corporation. Section 14 of the Law of Property Act 1925 . . .

For these reasons and for the reasons to be given by my noble and learned friend, Lord Oliver of Page 5 of 17

Aylmerton, I would allow this appeal and restore the order of Judge Thomas who ordered the respondents to deliver up Bleak House to the appellants.

LORD OLIVER OF AYLMERTON.

. . . . At the trial of the action giving rise to this appeal, the judge, Judge Thomas, found as a fact that it was always the intention of the respondents and of Mr. and Mrs. Maxwell-Brown [at the time when they bought Bleak House] that the balance of the purchase price should be raised by means of a mortgage and this was in fact done, the money being raised by Mr. and Mrs. Maxwell-Brown alone on the security of a legal charge on the property in favour of the Hastings and Thanet Building Society. The respondents were professionally advised in connection with this transaction and the judge found as a fact that their solicitor had advised them that the conveyance of the property should be taken in the names of all four of them. They were, however, unwilling personally to assume any liability for repayment of the mortgage and the property was in fact conveyed to Mr. and Mrs. Maxwell-Brown alone and charged by them to the building society. The conveyance contains no reference whatever to any interest of the respondents. It was, as already mentioned, a simple conveyance to Mr. and Mrs. MaxwellBrown as joint tenants beneficially and they were subsequently registered as proprietors with title absolute at H.M. Land Registry without any restriction being entered on the register.
From a date shortly after the completion of the purchase the respondents occupied the property in common with their daughter and son-in-law and they spent considerable further sums on improving the property. By the end of 1981, however, Mr. and Mrs. Maxwell-Brown were in financial difficulties and have since been adjudicated bankrupt. They had already, without the knowledge or consent of the respondents, borrowed further sums on the security of charges on the property and on 8 January 1982 they executed yet another charge by way of legal mortgage in favour of the appellants to secure a sum of 37,500. Some 26,199 of this was applied to discharging the mortgage in favour of the Hastings and Thanet Building Society and the balance for other purposes including the discharge of the further charges on the property which they had executed. . . .

My Lords, ever since Bolands case [1981] AC 487 it has been widely assumed by those called upon to advise banks and building societies that, so long as capital moneys arising from an exercise of their powers by trustees for sale holding on the statutory trusts have been paid in accordance with the statutory provisions to not less than two trustees or a trust corporation pursuant to the provisions of section 27 of the Law of Property Act 1925, a purchaser need not concern himself with the beneficial interest in the property even where one or more of the beneficiaries is or are in actual occupation of the property at the time of the transaction. That assumption was shared by the Law Commission in their report upon the implications of Bolands case presented to Parliament in August 1982, Property Law, The Implications of Williams & Glyns Bank Ltd v Boland (Cmnd. 8636), para. 42. This appeal is, therefore, of very considerable importance not only to conveyancers but to anyone proposing to lend upon the security of property in respect of which there is any possibility of the existence of beneficial interests which have not been disclosed by the apparent absolute owner. If it be the case, as the Court of Appeal held, that the payment by the appellants in the instant case to two properly constituted Page 6 of 17

trustees for sale, holding upon the statutory trusts, provides no sensible distinction from the ratio of the decision of this House in Bolands case the legislative policy of the 1925 legislation of keeping the interests of beneficiaries behind the curtain and confining the investigation of title to the devolution of the legal estate will have been substantially reversed by judicial decision and financial institutions advancing money on the security of land will face hitherto unsuspected hazards, whether they are dealing with registered or unregistered land. . . .

In the Court of Appeal in the instant case Dillon L.J. . . held that, quite apart from the provisions of the Land Registration Act 1925, the respondents had an equitable interest in the property protected by occupation which took priority over the appellants' mortgage by virtue of section 14 of the Law of Property Act 1925. My Lords, the ambit of section 14 is a matter which has puzzled conveyancers ever since the Law of Property Act was enacted. It has been suggested that its purpose was to make it clear that the provisions of Part I were not prejudicially to affect the rights of occupiers of the land who either had or, by virtue of their occupation, were in the process of acquiring title by adverse possession. If so, the section seems unnecessary. Another suggestion canvassed during the course of the argument was that it might have been intended to preserve the right of, for instance, a statutory tenant under the Rent Acts whose status could quite properly be said to arise "in right of" his occupation. For my part, I think that it is unnecessary for present purposes to seek to resolve the conundrum. What section 14 does not do, on any analysis, is to enlarge or add to whatever interest it is that the occupant has "in right of his occupation" and in my judgment the argument that places reliance upon it in the instant case founds itself upon an assumption about the nature of the occupying co-owners' interest that cannot in fact be substantiated. The section cannot of itself create an interest which survives the execution of the trust under which it arises or answer the logically anterior question of what, if any, interest in the land is conferred by the possession or occupation. It is suggested in Wolstenholme and Cherry's Conveyancing Statutes, 13th ed. (1972), vol. 1, p. 69, that section 14 was designed to preserve the principle, exemplified by Hunt v Luck [1902] 1 Ch 428, that a purchaser will have constructive notice of any rights reasonably discoverable from inspection of the property and, in particular, from inquiry of any occupier as to his interest and the terms on which he holds it. With that I respectfully agree. Leaving aside, however, the question whether the words "in right of such possession or occupation" have, as the judge thought and as the appellants have argued before your Lordships, the effect of limiting the interests to which the section applies to those which are conferred by the preceding fact of possession or occupation or whether, as the Court of Appeal held in effect, they mean merely "in respect of" or "associated with" possession or occupation, the section cannot, in my judgment, have the effect of preserving, as equitable interests in the land, interests which are overreached by the exercise of the trustees' powers or of bringing onto the title which the purchaser from trustees for sale is required to investigate the equitable interest of every beneficiary who happens to be in occupation of the land. That would be to defeat the manifest purpose of the legislature in enacting the sections to which reference has already been made. Looking at the interest of the tenant in common in actual occupation and considering for the moment only the position in relation to unregistered land, one has, as it seems to me, to bear in mind always the distinction between his rights as against his co-beneficiaries or against the trustee or trustees in whom the legal estate is vested and his rights against a purchaser of the legal estate from the trustees for sale. His interest is overreached and the purchaser is absolved from inquiry only if the statutory requirements respecting the payment of capital money arising under a disposition upon trust for sale are complied with: sections 2(1)(ii) and 27. Until that occurs, he remains entitled to Page 7 of 17

assert against the trustees and, indeed, against any purchaser from the trustees who has not complied with the statutory requirements all the incidents of his beneficial interest in the proceeds of sale of the property and in the net rents and profits until the sale. One of the incidents of that beneficial interest is, or may be according to the agreement between the beneficiaries or to the purpose for which the trust was originally created, the enjoyment of the property in specie either alone or concurrently with other beneficiaries. But the enjoyment in specie, whilst it may serve to give notice to third parties of the occupier's interest under the trust, is not a separate and severable right which can be regarded as, as it were, free standing. It is and has to be referable to the trust from which, and from which alone, it arises. It is the beneficial interest in the rents and profits pending sale that is the foundation of that enjoyment and there is nothing in the statute or in the cases - leaving aside, for the moment, the Boland case which I shall have to come to a little later - to suggest that the enjoyment of the property in specie of itself confers some independent right which will survive the operation of the overreaching provisions of the Law of Property Act 1925. Indeed, the framers of that legislation would, I think, have been shocked and surprised to hear it asserted that a purchaser in proper form from the trustees of the statutory trusts was required to investigate the purposes for which the trust property had been acquired by the trustees or the terms of some private and unwritten agreement or understanding between the beneficiaries inter se or between one or more of the beneficiaries and the trustees. . . . . . . the reason why a purchaser of the legal estate (whether by way of outright sale or by way or mortgage) from a single proprietor takes subject to the rights of the occupying beneficiary is not because section 14 of the Act confers upon the latter some interest in land which is incapable of being overreached but because, having constructive notice of the trust as a result of the beneficiary's occupation, he steps into the shoes of the vendor or mortgagor and takes the estate subject to the same equities as those to which it was subject in the latter's hands, those equities and their accompanying incidents not having been overreached by the sale under the provisions of section 2(1) and section 27 of the Act. Where the purchase has taken effect in accordance with those provisions, it is quite clear from the terms of the statute both that the purchaser, even with express notice, is not concerned with the beneficiary's interest in the proceeds of sale or the net rents and profits until sale and that that interest is overreached. The beneficiary's possession or occupation is no more than a method of enjoying in specie the rents and profits pending sale in which he is entitled to share. It derives from and is, as Mr. Lindsay has graphically put it, fathered by the interests under the trust for sale. Once that goes, as it does on the execution of the trust for sale, then the foundation of the occupation goes and the beneficiary has no longer any "interest ... to which he may be entitled in right of such ... occupation." We are, of course, concerned here not with the execution of the trust by a sale of the land by the trustees, but with the exercise by the trustees of their power to raise capital money by creating a charge on the land. But the same principle must, in my judgment, apply, the "overreaching" in this case consisting in the creation by the trustees of a legal estate and of powers incidental thereto (including the mortgagee's power of sale) which have an absolute priority over the beneficial interests, although, no doubt, those beneficial interests and their accompanying incidents continue as against the equity of redemption which remains vested in the trustees. If I may say so respectfully, the reasoning of the Court of Appeal in the instant case starts at the wrong end by assuming that there is an interest conferred by occupation which, were it not for section 14, would be in some way prejudiced by the provisions of Part I of the Act, whereas in fact the occupier's interest in this instance is one which stems from, depends upon and is co-terminous with the interest in the rents and profits arising under those very provisions and which is displaced by the execution of the trust or the exercise of the trustees' powers to the same Page 8 of 17

extent as that interest. . . I would therefore allow the appeal and restore the order for possession in favour of the appellants made by Judge Thomas in the Chancery Division.

Lord Bridge, Lord Mackay and Lord Goff expressed agreement with both Lord Templeman and Lord Oliver.

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State Bank of India v Sood [1997] Ch 276

Peter Gibson L.J. This is an appeal, brought with the leave of Ward L.J., from the order of Judge Willis in the Croydon County Court. It raises a question of importance for conveyancers, for creditors the debts owed to who, are secured on property and for persons with only equitable interests in registered land. The question can be formulated in this way: where two trustees for sale hold registered land for themselves and other beneficiaries and mortgage the land as security for existing and future liabilities of themselves and other persons, are the equitable interests of the beneficiaries overreached, notwithstanding that no money was advanced by the mortgagee to or at the direction of the trustees contemporaneously with the mortgage? The judge in effect answered that question in the negative.

The question arises in the following circumstances. On 23 February 1978 the freehold property, 19, Landseer Road, Sutton, Surrey, was transferred to the first and second defendants who were registered shortly thereafter as, and have remained, the proprietors of the property. On 13 December 1983 the first and second defendants executed a deed of legal charge which was a second legal charge on the property. By that deed they charged the property by way of legal mortgage as security to the Punjab National Bank for the discharge on demand of all present and future liabilities of them jointly and severally and of Sobel Textiles (U.K.) Ltd. ("Sobel") on any account and all other present, future, actual and contingent liabilities of them jointly and severally and of Sobel to the Punjab National Bank, . . . On 4 December 1989 the Punjab National Bank assigned the benefit of the legal charge to the plaintiff, the State Bank of India. It claims in the statement of claim that it is owed over 1m. by the first and second defendants under the legal charge. . . . In April 1992 and January 1993 it demanded payment from the first and second defendants respectively and, when the demands were not satisfied, it commenced proceedings . . . seeking possession of the property.

[He went on to explain that the second defendant was now bankrupt and that the third to seventh defendants claimed to have beneficial interests in the house under a resulting or constructive trust.] It is not in dispute that on the facts assumed to be true the first and second defendants have at all material times been trustees of the legal estate in the property, holding it on trust for sale and the net proceeds of sale and the net rents and profits until sale for themselves and the third to seventh defendants or some of them as tenants in common. . . . The register shows no restriction on the registered proprietors' powers of disposition nor is there any entry in the register relating to the third to seventh defendants' claimed interests and no caution against dealing has been registered.
Before I turn to the statutory provisions, I would make a few general observations on overreaching. As is explained by Charles Harpum in his illuminating article, "Overreaching, Trustees' Powers and the Reform of the 1925 Legislation" [1990] C.L.J. 277, overreaching is the process whereby existing interests are subordinated to a later interest or estate created pursuant to a trust or power. Mr. Harpum arrived at that statement of the true nature of overreaching by a consideration of the effect of the exercise of powers of disposition in a settlement, referring to Sugden on Powers, 8th ed. (1861), pp. 482, 483. He argued cogently that a transaction made by a person within the dispositive powers conferred upon him Page 10 of 17

will overreach equitable interests in the property the subject of the disposition, but ultra vires dispositions will not, and the transferee with notice will take the property subject to those interests. Mr. Harpum expressed the view that the exercise intra vires of a power of disposition which does not give rise to any capital money, such as an exchange of land, overreaches just as much as a transaction which does. There is every reason to think that the draftsman of the 1925 property legislation fully appreciated the true nature of overreaching. A principal objective of the 1925 property legislation was to simplify conveyancing and the proof of title to land. To this end equitable interests were to be kept off the title to the legal estate and could be overreached on a conveyance to a purchaser who took free of them.

[He read through s. 2 of the Law of Property Act 1925 and the statutory provisions relating to capital money]
I do not think that the exact significance of "capital money" matters for the purposes of the present case as I am prepared to assume that in respect of at least some of the indebtedness secured under the legal charge capital money did not arise under the disposition, and also that some capital money may have done subsequently to the execution of the legal charge.

There is no dispute that the equitable interests of the third to seventh defendants were at the date of the legal charge capable of being overreached. That condition of section 2(1)(ii) was therefore satisfied. Most of the argument has turned on the final condition of that paragraph relating to compliance with the statutory requirements respecting the payment of capital money, and I shall shortly return to this.

Trustees for sale have a duty under section 26(3) of the Law of Property Act 1925 to consult, so far as practicable, the persons beneficially interested in possession in the rents and profits of the land until sale and to give effect to their wishes, but a purchaser is not to be concerned to see that the provisions of that subsection have been complied with. Section 27(1) of the Law of Property Act 1925 provides that a purchaser of a legal estate from trustees for sale is not to be concerned with the trusts affecting the proceeds of sale of land subject to a trust for sale or affecting the rents and profits of the land until sale.

Section 27(2) of the Law of Property Act 1925 (as amended by the Law of Property (Amendment) Act 1926) provides (so far as material): "the proceeds of sale or other capital money shall not be paid to or applied by the direction of fewer than two persons as trustees for sale, except when the trustee is a trust corporation . . ." It is common ground that this provision contains the statutory requirements regulating the payment of capital money which are referred to in section 2(1)(ii).

. . . The case of the third to seventh defendants has always been that their beneficial interests in respect of the property, being registered land, coupled with their actual occupation of the property, give them overriding interests within section 70(1)(g) which subsisted at the time of the legal charge. They say that their interests were not overreached by the legal charge because no capital money arose Page 11 of 17

thereunder contemporaneously therewith and that accordingly their interests bound the plaintiff and take priority over its interests under the legal charge. The plaintiff's case has always been that the equitable interests of the third to seventh defendants were overreached by the legal charge, there being no statutory requirement that capital money should arise contemporaneously with the disposition. . .

I accept that a novel and important point of law is raised by this appeal. Lending institutions regularly take security from businessmen in the form of a legal charge on property (which very frequently means that the matrimonial home is charged) to secure existing and future indebtedness, and very commonly that property will be registered land held by two registered proprietors on trust for sale with no restriction registered in respect of their power to transfer or mortgage that property. It was not suggested that it had ever been the practice of mortgagees to make inquiries of occupiers of the property as to any claimed rights. Yet if the third to seventh defendants are right, that is what the mortgagees must do if they are not to take subject to the beneficial interests of the occupiers.

It is remarkable that the point of law taken by those defendants does not appear to have arisen before in any reported case. We were taken by counsel to only two cases: Williams & Glyn's Bank Ltd. v. Boland [1981] A.C. 487 in the Court of Appeal and in the House of Lords and City of London Building Society v. Flegg [1986] Ch. 605; [1988] A.C. 54 in the Court of Appeal and in the House of Lords. In the Boland case it was common ground between the parties that there was no overreaching. Money was raised on mortgage of registered land and paid to a single trustee holding the land on trust for sale, and it was held that the rights of beneficiaries who were in occupation and of whom no inquiries had been made were not mere minor interests but overriding interests within section 70(1)(g) and so binding on the mortgagee. In the present case, as in the Flegg case, the registered proprietors were two in number. But in the Flegg case it was held that where money was raised on mortgage of registered land to discharge an existing incumbrance (and so in exercise of the power conferred by section 28(1) of the Law of Property Act 1925 by reference to section 71(1)(i) of the Settled Land Act 1925) and paid to two trustees for sale, the rights of occupying beneficiaries were overreached. In the present case the legal charge was not entered into to raise money for the discharge of an existing incumbrance nor was any money raised contemporaneously with the legal charge. No less surprising is the fact that counsel were not able to point to a single textbook for assistance or to any other academic writing, though the court drew counsel's attention to Mr. Harpum's article to which I have already referred.

. . . We must assume, in the absence of evidence or admissions to the contrary, that no money was raised under the legal charge contemporaneously with it. . . [and] I should record that Mr. Havey and Mr. Williams accept that the first and second defendants were acting intra vires as trustees for sale in entering into the legal charge.

. . . The crucial issue is the true construction of the final condition of section 2(1)(ii) relating to compliance with statutory requirements respecting the payment of capital money. There is no dispute that if capital money does arise under a conveyance by trustees for sale to a purchaser it must be paid Page 12 of 17

to or applied as section 27(2) dictates. But for overreaching to occur, does capital money have to arise on and contemporaneously with the conveyance?

The judge appears to have assumed that there could be no overreaching if no capital money arose. He said:

"we have to look to see whether capital money was paid [to] or applied by the direction of the two trustees. If it was, then the defendants have no defence; if it was not, then the bank cannot overreach and they have an arguable defence on the evidence."
Mr. Havey and Mr. Williams submitted that was indeed the position and they said that the arising of capital money on the conveyance was the assumption on which section 2(1)(ii) was drafted. Mr. Crawford's initial submission accorded with that view, but he sought to escape the consequences by contending that capital money arose whenever the Punjab National Bank advanced money, even if before the legal charge was executed. However, I cannot accept that what was done prior to the legal charge has any relevance to the condition that "the statutory requirements respecting the payment of capital money arising under a disposition upon trust for sale are complied with." Nor can I accept Mr. Crawford's further submission that the debt existing at the date of the legal charge was not materially different from the secured debt which existed at the date of the mortgage in Flegg and was discharged in that case out of the money raised. The circumstances are wholly different.

Mr. Crawford however had recourse to a further submission, adopting a point suggested by the court, that the relevant condition in section 2(1)(ii) should be construed as applying only to those cases where there was capital money arising under a disposition upon trust for sale, the statutory requirements of section 27(2) being simply irrelevant to a transaction under which no capital money arises. There are several types of conveyance to a purchaser (within the statutory meanings of those terms) other than a charge to secure existing and future debt which do not give rise to capital money, for example, an exchange or a lease not at a premium. Why should the legislature have intended to exclude such conveyances from having an overreaching effect? It is interesting to note that the precursor of section 2(1), viz. section 3(2)(ii) of the Law of Property Act 1922, used as one of the conditions for overreaching to occur the formula "If any capital money arises from the transaction . . . the requirements of this Act respecting the payment of capital money arising under a trust for sale . . . are complied with." However the form of section 3(2) differed in a number of respects from section 2(1) of the Act of 1925 and it may not be safe to infer that the later provision was intended to re-enact the substance of the earlier provision. But it points to the relevant condition of section 2(1) being worded in surprisingly oblique fashion if what was intended was that capital money must arise so that the statutory requirements can be complied with. Mr. Havey drew attention to the word "any" in connection with "capital money" in section 2(1)(iii) and (iv) and suggested that its omission from the reference to "capital money" in section 2(1)(i) and (ii) was significant. But the structure of those paragraphs is quite different from section 2(1)(iii) and (iv) and the draftsman could not have achieved the effect of section 3(2) of the Act of 1922 by adding "any" before "capital money" in section 2(1)(i) or (ii).

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The relevant condition in section 2(1)(ii) is the same as that in section 2(1)(i). The overreaching powers conferred by the Settled Land Act 1925 include power to convey by an exchange or lease as well as by a mortgage or charge where capital money may not arise (see section 72 of that Act). The statutory requirements governing capital money (to be paid to or applied by the direction of not less than two individuals or a trust corporation: sections 94 and 95 of that Act) can only apply to those conveyances giving rise to capital money. The same interpretation must apply to the condition in section 2(1)(i) as it does to the conveyancing condition in section 2(1)(ii).

A more substantial argument of policy advanced on behalf of the third to seventh defendants is that if overreaching occurs where no capital money arises, the beneficiaries' interests may be reduced by the conveyance leaving nothing to which the interests can attach by way of replacement save the equity of redemption, and that may be or become valueless. I see considerable force in this point, but I am not persuaded that it suffices to defeat what I see to be the policy of the legislation, to allow valid dispositions to overreach equitable interests. In my judgment on its true construction section 2(1)(ii) only requires compliance with the statutory requirements respecting the payment of capital money if capital money arises. Accordingly I would hold that capital money did not have to arise under the conveyance.

The judge further said:

"I consider that overreaching must take place at the time of the execution. I think that the plaintiff does not object to that in principle, but says that the defendants' right simply attaches to the equity of redemption; but I do not think one can have a condition of overreaching on moneys which may or may not be drawn down later. For overreaching to take effect all parts of section 27(2) must be complied with; it is a two stage process which requires, first, the existence of either proceeds of sale or capital moneys and, secondly, those are either to be paid to the two trustees or applied at their discretion. The plaintiff says it does not matter--because there was a general direction for application in the charge-if it comes into existence or is applied at a subsequent time. I think that is wrong; it is necessary for the moneys to be in existence at the time of the charge so that those moneys can either be received or applied at the trustees' directions."
. . . Both Mr. Havey and Mr. Williams supported the judge's conclusion that some capital money must arise contemporaneously with the conveyance for there to be overreaching. They said that if a conveyance provided only for deferred payment, that would not suffice. They further submitted that provided some capital money arose contemporaneously with the conveyance and section 27(2) was complied with, overreaching would occur even though other money was subsequently advanced under the conveyance. Thus if a 1m. facility was secured by a mortgage and in the course of time was fully drawn on but at the time of the mortgage only 100 was advanced, there would nevertheless be overreaching in respect of the whole 1m. thereby secured, whereas if the 100 had not been advanced at the time of the mortgage, there would have been no overreaching. I do not believe that the statutory language supports a requirement producing such a surprising and illogical result. Mr. Havey drew our attention to a large number of provisions in the Settled Land Act 1925 which, he said, showed that Page 14 of 17

money arising from a transaction must be received or applied at the same time as the transaction. I cannot agree, though I of course accept that to be paid or applied, capital money must be in hand. If and to the extent that capital money arises after the conveyance, section 27(2) must be complied with for the mortgagee to obtain a good receipt. If it is not, for example if an advance is made after a mortgage has been executed but under a facility provided for by the mortgage but is not paid to or at the direction of two or more trustees or a trust corporation, that would not affect the overreaching which would have occurred on the mortgage.

I take the following statement in Snell's Equity, 29th ed. (1990), p. 63 to be correct: "A conveyance to a purchaser of a legal estate for money or money's worth will overreach . . . any equitable interest or power affecting the estate whether or not the purchaser has notice of it, if the conveyance is made . . . (ii) by trustees for sale . . . provided that the . . . equitable interest or power is one of those which are capable of being overreached by the conveyance, and that any capital money arising from the transaction is paid-in case . . . (ii) to the trustees, who must be at least two in number, or a trust corporation . . ." (My emphasis.) The correct analysis of the position in the present case is that on the execution of the legal charge, the interests of the third to seventh defendants were overreached and attached to the equity of redemption. The legal estate in the property was by the legal charge made subject to the rights thereunder of the Punjab National Bank which were subsequently assigned to the plaintiff, including the right to sell the property. The value of the equity of redemption on the execution of the legal charge would reflect the then existing liabilities thereby secured. That value would be further reduced as further liabilities arose and were secured under the legal charge. In the light of City of London Building Society v. Flegg [1986] Ch. 605; [1988] A.C. 54 it follows from the overreaching that section 70(1)(g) does not avail the third to seventh defendants and that their defence on this point cannot succeed and should be struck out. On the assumption that they were not consulted about the legal charge by the first and second defendants, it may be that they have the right to obtain redress against the trustees.

Much though I value the principle of overreaching as having aided the simplification of conveyancing, I cannot pretend that I regard the resulting position in the present case as entirely satisfactory. The safeguard for beneficiaries under the existing legislation is largely limited to having two trustees or a trust corporation where capital money falls to be received. But that is no safeguard at all, as this case has shown, when no capital money is received on and contemporaneously with the conveyance. Further, even when it is received by two trustees as in City of London Building Society v. Flegg [1986] Ch. 605; [1988] A.C. 54, it might be thought that beneficiaries in occupation are insufficiently protected. Hence the recommendation for reform in the Law Commission's report, "Transfer of Land, Overreaching: Beneficiaries in Occupation" (1989) (Law Com. No. 188), that a conveyance should not overreach the interest of a sui juris beneficiary in occupation unless he gives his consent. Mr. Harpum in the article to which reference has been made proposed an alternative reform, limiting the power of trustees to mortgage. Whether the legislature will reform the law remains to be seen. I should add for completeness that we were assured by counsel that the recent Trusts of Land and Appointment of Trustees Act 1996 was of no assistance and we have not considered its effect. Page 15 of 17

Despite the dissatisfaction with the existing law which I have voiced, for the reasons which I have given I would allow this appeal and strike out the passages in the defence identified by the plaintiff in its summons of 10 August 1994.

Pill L.J
I agree. The preliminary point now at issue turns upon the construction of section 2(1)(ii) of the Law of Property Act 1925 and whether, for overreaching to occur, capital money has to arise on and contemporaneously with the conveyance. On this issue, I address the questions raised on the effect of the presence or absence of the word "any" in the statutory provisions.

Peter Gibson L.J. has set out section 2(1) of the Law of Property Act 1925 in his judgment. Section 2(1)(ii) 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: "(ii) the conveyance is made by trustees for sale and the equitable interest or power is at the date of the conveyance capable of being overreached by such trustees under the provisions of subsection (2) of this section or independently of that subsection, and the statutory requirements respecting the payment of capital money arising under a disposition upon trust for sale are complied with; . . ." The paragraph does not expressly require the payment of capital money as a prerequisite of overreaching but does provide that the statutory requirements respecting the payment of capital money arising are complied with. The defendants submit that because it is necessary to comply with statutory requirements respecting the payment of capital money arising under a disposition upon trusts for sale, it follows that overreaching can occur only if capital money does arise. The words "if any" do not appear after "capital money" in paragraph (ii) (or in paragraph (i)), as they would if capital money were not a prerequisite. By contrast, it is submitted, the word "any" appears before "capital money" in paragraphs (iii) and (iv) of subsection (1). Reference was also made to the presence of the word "any" in section 3(2) of the Law of Property Act 1922, the precursor of section 2(1)(ii). The subsection provides that overreaching shall not occur unless: "(ii) If any capital money arises from the transaction, the same is paid into court, or the requirements of this Act respecting the payment of capital money arising under a trust for sale or a settlement, are complied with." (My emphasis.)

I agree with the conclusion of Peter Gibson L.J. and see no merit in the submission based upon the presence of the word "any" in the other provisions mentioned and its absence in paragraph (ii). The second limb of paragraph (ii) is concerned (as is that of paragraph (i)) to ensure compliance with statutory requirements and the requirements concerned are those "respecting the payment of capital money." The words "capital money arising" serve to identify the relevant statutory requirements and the sentence would read oddly if the word "any" appeared in this context. The requirements arise only if capital money arises; it does not follow that there is no overreaching unless capital money does arise. If capital money does not arise, compliance does not arise. Page 16 of 17

In paragraphs (iii) and (iv) of section 2(1), the expression "capital money arising" is not linked with "statutory requirements" and the word "any" can appear before "capital money" without doing offence to the language of that paragraph. The presence of the word "any" demonstrates the statutory intention and I regard its presence in paragraphs (iii) and (iv) as an indication that section 2(1) as a whole does not require the payment of capital money contemporaneously with the conveyance if overreaching is to occur. No logical reason for a distinction between the situations contemplated in paragraphs (i) and (ii) on the one hand and those in (iii) and (iv) on the other was suggested.

As to the Act of 1922, the form of drafting adopted in section 3(2) was quite different from that in section 2(1) of the Act of 1925. The sub-section was negative in form and precluded overreaching except in the circumstances set out. The words "if any" before "capital money" in paragraph 2 did establish beyond any doubt that overreaching could occur without capital money arising from the transaction. However the words "if any" fall naturally into the text in the context of that subsection as drafted. I cannot accept that their absence in section 2(1)(ii) of the Act of 1925, which was a consolidating Act, demonstrates any changed or different legislative intention between the Acts of 1922 and 1925. I cannot read into the provisions of the Act of 1925, an assumption that, for overreaching to occur, capital money must arise on and contemporaneously with the conveyance. Indeed the appropriate construction is that it need not arise.

Counsel for the defendants accepts that, even in a case such as the present where large sums of money are involved, a nominal payment of capital at the time of the conveyance would enable the mortgagee to overreach. Such a system would render the protection of the equitable interests of the beneficiaries, for which the defendants contend, largely illusory in the event. Had Parliament intended to protect those interests by requiring the contemporaneous payment of capital money if overreaching is to occur, I would have expected express and stringent provision. Hirst L.J. I agree with both judgments.

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