The case of AIB Group (UK) plc v Turner  EWHC 2994 (Ch), heard over a number of days in the Birmingham District Registry towards the end of 2015, is something of a puzzle.
The Bank had been granted a valid first registered legal charge over “The Cottage” in Derbyshire by its legal owners, Mr and Mrs Turner, on 11 October 2005. When the Bank came to enforce its charge, however, Maxine Turner-Hankinson, the daughter in law of Mr and Mrs Turner claimed that the Cottage had been held on trust for her absolutely; and that her beneficial interest was an overriding interest taking priority to the mortgage. Her case was that she had orally agreed with Mr and Mrs Turner in 1991 that she would pay them two lump sums (which she duly paid) and that they would transfer the Cottage to her; alternatively that the entire beneficial interest in the Cottage would be hers. Accordingly, she asserted that a common intention constructive trust has arisen whereby the Cottage was held by Mr and Mrs Turner on trust for her absolutely. Further, she claimed that she had been in sufficient actual and obvious occupation of the property when the mortgage was granted to the Bank and that, as a consequence, her equitable interest took priority over the charge as an overriding interest pursuant to section Schedule 3 of the Land Registration Act 2002.
A claim to an overriding interest taking priority over a mortgage is usually a lender’s worst nightmare. By its very nature the overriding interest will not be registered; it follows that the solicitor instructed by the lender to obtain the security might be entirely blameless in not having protected the lender. Further, the relevant facts that are said to give rise to the overriding interest will be exclusively in the possession of the party claiming the interest; who will then be able to give the necessary evidence in support of the claim. It is usually difficult for the lender to obtain evidence to gainsay what is being asserted; and the lender is often left putting the claim to proof.
In the Turner case, the consequence for AIB, had Maxine succeeded in showing that she owned the entire equitable interest free of the Bank’s charge, she would have been to render the Bank’s charge worthless. Maxine would have been entitled to require legal title to the Cottage to be conveyed to her, free of the registered charge. Upon any sale, she would have been entitled to the entire proceeds of sale in priority to the Bank – which would have been left with nothing.
In fact, her claim failed. After a three day trial, the Court concluded that there was no agreement, arrangement or understanding that she would acquire the Property (or the beneficial interest in it) in return for the lump-sum payments that she made; and that the payments that she made to Mr and Mrs Turner were made to different reasons. The Court further concluded that she was not in actual occupation of the Cottage in October 2005. In fact, she had relocated to Barbados and lived there. At the time there was no intention to return to the UK and to live in the Cottage. Accordingly, although she occupied the Cottage from time to time when in the UK, such occasional and convenient occupation was not “actual occupation” for the purposes of the Land Registration Act 2002. The Bank succeeded on the facts and it did not have to rely on its alternative argument to be subrogated to a prior discharged mortgage to which it contended any interest Maxine might have was subject.
Why is this case a puzzle?
Section 2(1) of the Law of Property Act 1925 provides that a conveyance [which includes the grant of a mortgage] to a purchaser [which includes a mortgagee] of a legal estate in land shall overreach any equitable interest or power affecting that estate, whether or not he has notice of it, if (amongst other things):
"(ii) the conveyance is made by 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; ..."
This provision (to be read with section 27 of the LPA 1925) provides for the doctrine of the overreaching. In the well-known case of City of London Building Society v Flegg  AC 54, a mortgage over property was granted two legal owners, a husband and wife, in return for capital monies. It was claimed by the wife’s parents that they had a beneficial interest in the property and had been in actual occupation of the property at the time of the charge, and that their beneficial interest was therefore an overriding interest taking priority over the Bank’s charge. The House of Lords rejected the claim, confirming that their interest was overreached when the mortgage was granted and the capital monies were paid to the two trustees. An interest could not be an overriding interest if it had been overreached by the disposition that it was said to override.
The puzzle is that it is not clear why the AIB was not entitled to rely on section 2 of the LPA 1925 and on Flegg to argue that, even if Maxine succeeded on the facts, she was doomed to lose on the law. The only reasonable inference is that, in the whirlwind of complicated factual and legal arguments concerning common intention constructive trusts, second homes in Barbados and subrogation to prior discharged securities, the point was simply not taken at all. If it had been, it is inevitable that the Bank could have saved substantial legal fees and massively shortened the time taken to enforce its charge. That the Bank might still have been fully secured for the legal fees it did incur and interest will be little consolation.
And for that reason the case is a reminder to us all not to overlook overreaching.