s.24A order for sale creates an equitable interest
Summary: The husband (‘H’) and his second wife (‘W2’) were appealing an order made in February 2016 which had determined a number of property issues. The property issues arose out of a final consent order made back in 2009 between H and his first wife (‘W1’). The consent order provided that H would pay W1 a lump sum of £375,000 in three instalments. He had paid the first two (totalling £200,000) but not the third.
The consent order set out that, if H failed to pay any instalment, W1 was entitled to sell a number of properties to recover the lump sum due to her. Principally, these were the property she lived in and the property H and W2 lived in; both were owned by H.
A year later, the court made an order for sale in respect of the property H and W2 were living in. This provided that, once sold, the mortgage and costs of sale would be paid and then W would be paid her lump sum. The order contained a recital that W2 would co-operate in the sale and would not assert any claim in the property that would defeat W1’s claim. The order was never implemented.
On 18 March 2011, bankruptcy proceedings were commenced against H. On 9 June 2011, W1 registered a restriction against [14 DL] based on her having a beneficial interest in the proceeds of sale pursuant to orders made in divorce proceedings and subsequent enforcement. H was made bankrupt on 2 March 2012. A bankruptcy order was also made against W2. As a result of H’s bankruptcy, in April 2012, H and W1 agreed that there was no point in pursuing any further proceedings. H was discharged from bankruptcy on 2 March 2013.
On 17 February 2014 the trustee in bankruptcy’s solicitors wrote to W1 requesting vacant possession of [14 DL] to enable it to be sold. W asserted that the 2009 consent order gave her an equitable charge or interest in the properties, as a result of which she was a secured creditor. The trustee’s solicitors argued to the contrary.
At a possession proceedings hearing on 11 March 2014 brought by the mortgagee (Lloyds Bank Plc) in respect of 14 DL, the district judge, when making a possession order, expressed the view that he did not think the 2009 consent order gave W an equitable charge: a fact relied on by the appellants in the High Court proceedings.
On 14 April 2014, the trustee in bankruptcy entered into a settlement agreement with H and the second appellant. One of the recitals in the agreement recorded that H and the second appellant agreed to purchase any interest the estates in bankruptcy may have in eight properties (including 14 DL and 67 KR) and other assets in full and final settlement of the estates in bankruptcies interest. The settlement monies totalled £230,000 and was lent to the appellants by a third party, who was given an option to purchase both properties.
No transfers were required as H had remained the sole registered owner of the properties: the trustee was never registered as the proprietor. The trustee agreed to remove all restrictions registered against the properties in respect of his interest. On 14 April 2014, H and W2 entered into a declaration of trust, declaring that H held 14 DL and 67 KR on trust for the benefit of W2.
On 15 August 2014 W1 issued an application for a number of orders to enable the sale of 14 DL to take place and for the payment to her of the outstanding lump sum and interest. On 3 November 2014 an order for sale was made in respect of 14 DL. The order provided for the net proceeds of sale (being the gross sale price less redemption of any mortgages which had priority over W’s charge) to be paid into court. H was ordered to serve a statement setting out his objections to the proceeds of sale being paid to W.
On 5 November 2014 the second appellant registered a restriction against 14 DL pursuant to the declaration of trust. On 9 December 2014 District Judge Hess signed the sale documentation on behalf of H to enable a sale to take place at £565,000. On 16 June 2015 he joined the second appellant to the proceedings because of the restriction she had registered. He gave directions for the filing of submissions by all the parties. On 13 August 2015 W issued an application under section 37 of the MCA 1973 seeking an order that the declaration of trust be set aside.
At first instance Deputy District Judge Simpson held:
H and W2 appealed the order.
Held: Mr Justice Moylan found that an order for sale under s.24A MCA 1973 creates an immediate equitable interest in the property to be sold.
Here, the consent order had contained an order for sale under s.24A MCA 1973, insofar as it stated that if H defaulted in payment of any of the instalments, the properties ‘shall be sold’. The consequential provisions included payment of a lump sum to W1 from the proceeds of sale from the properties. W1 had an immediate right to sell the property and a right tp the payment of her lump sum. As a result, Moylan J had little hesitation in holding that the 2009 consent order gave W an immediate equitable interest in the properties (Hughmans Solicitors v Central Stream Services Ltd (In Liquidation)  EWCA Civ 1720 and Mountney v Treharne  Ch 135 applied).
Moylan J went on to hold that W1 had not surrendered her interest in and rights against the properties during H’s bankruptcy. Her correspondence with the trustee in bankruptcy had made it clear that she was asserting her interest in the properties even though she did not place a value on her security.
Equally the trustee had not made a decision in relation to W’s interest. In fact, the trustee’s correspondence made it clear that any sale of the properties would lead to further expenses being incurred to establish the extent of W’s interest.A further consideration was the effect of dispositions of a registered estate on the priority of an interest (sections 28 to 31, Land Registration Act 2002 (LRA 2002)). If there has been a registrable disposition, W’s interest would only be protected if the interest is a registered charge or the subject of a notice in the register (section 29(2)(a)(i), LRA 2002) or fell within a specified category of unregistrable interests of persons in actual occupation that override registered dispositions (schedule 3, LRA 2002).
W was in actual occupation of 14 DL but not 67 KR. Accordingly, the priority of W’s proprietary interest would be protected in respect of 14 DL but not 67 KR. Furthermore, W’s interest had not been overreached as there had been no conveyance within the scope of section 2 of the Law of Property Act 1925.
In any event, as there was no registrable disposition, W’s interest in each of the properties remained enforceable against H and the second appellant. Furthermore, even if there were a registrable disposition, her interest in 14 DL remained enforceable.Neither was it necessary for the declaration of trust to be set aside for W to be able to enforce her equitable interest against the properties due to the priority of W’s interest (section 28, LRA 2002).
However, Moylan J allowed the appeal against the order setting aside the declaration of trust. Deputy District Judge Simpson had determined the application on submissions alone which had disadvantaged the second appellant, who was a litigant in person, from giving evidence about the circumstances in which she entered into the declaration of trust. The judge was not in a position to fairly determine the application.
The most important lesson to learn from this somewhat complicated case is that when acting on behalf of a recipient of proceeds of sale under a section 24A order, you should routinely apply to the Land Registry after the order has been made, to protect the beneficial interest in the proceeds of sale by entering a restriction on the register.