City of London BS v Flegg [1998] 1 AC 54

KEY POINTS

• The legal mortgage held by the City of London Building Society (the appellants) overrode the beneficial interests of the respondents. This meant that the legal mortgage took priority, and the respondents' interests were transferred to the equity of redemption held by the Maxwell-Browns (the mortgagors) and the amount advanced by the appellants.

FACTS

• The land, known as Bleak House, had been conveyed to Mr. and Mrs. Maxwell-Brown, but the respondents had provided a significant portion of the purchase price. Later, the Maxwell-Browns granted a legal charge to the appellants without the respondents' knowledge, which they did for their own purposes and in violation of trust.

• The respondents relied on section 14 of the Law of Property Act 1925, asserting their right to continue occupying the property despite the overreaching of their interests. The appellants contended that the respondents' beneficial interests were overreached by the legal charge, transferring them to the equity of redemption held by the Maxwell-Browns and the sum advanced by the appellants.

• The appellants sought possession of Bleak House to enforce their security, while the respondents resisted the claim.

JUDGEMENT

• Appeal allowed.

COMMENTARY

• This case clarifies the priority of interests in registered land when a legal mortgage is involved. It underscores the principle that legal mortgagees who act in good faith and without notice of competing interests are protected by the law.

• The decision also highlights the importance of properly registering land transactions to ensure the clarity of property rights.

ORIGINAL ANALYSIS

• Fs and Ms bought a house in Ms’ names but F having a beneficial interest by contributing to the price. Ms took out a mortgage without Fs’ knowledge and defaulted. Fs claimed an overriding interest under s.70(1)(g) – actual and apparent occupation. 

• HL held that Fs had no interest once the payment had been made by the bank, since their interest, held on trust by Ms, had been overreached and therefore overriding interests was irrelevant since the interest no longer existed. HL held that to find Fs’ interest overrides that of a purchaser would be to unduly burden the purchaser.

• NB the decision may be different today due to TLATA 1996 though there is debate on this. 

RELATED CASES

• Birmingham Midshires BS v Sabherwal