Mortgage Possession Proceedings

Nigel Clayton examines a third-party application to be joined in mortgage possession proceedings, claiming a right of occupation by way of constructive trust or proprietary estoppel. The High Court ruled that shared occupation does not establish ownership and dismissed the claim for lacking real prospects of success.

Case Name, Reference and Bailii Link

Facts

A lender, TCF, provided a bridging loan to a company, FOL, secured on the lease of a residential flat. In subsequent mortgage possession proceedings, a person, P, applied to be joined as a second defendant and for permission to file an Amended Defence (her original Defence having been struck out).

FOL was owned by trustees of a discretionary family settlement, of which P was one of several discretionary beneficiaries. The application was made on the basis that (1) P had a beneficial interest in the lease by way of proprietary estoppel or constructive trust, and (2) this interest was binding on the lender.

Issues

The High Court had to consider an application by a third party to be joined in mortgage possession proceedings on the basis that she claimed an interest in the mortgaged property by way of constructive trust or proprietary estoppel. In particular, the court had to determine whether the claimed right of occupation shed any light on the beneficial ownership and whether it would pass the ‘merits test’.

Decision

(HHJ Davis-White KC sitting as a Judge of the High Court): As to the application for permission to amend, the court adopted as its ‘merits test’ the same test that applies in applications for service out of a claim form and which was held to apply to applications for permission to amend by the Court of Appeal in Kawasaki Kisen Kaisha Ltd v James Kemball Ltd [2021] EWCA Civ 33 – a serious issue to be tried.

On the merits, although P’s claim to a beneficial interest was pleaded as being based on proprietary estoppel or a common intention constructive trust (the elements of which the court reviewed), there were two connected and fatal points which meant that P’s case was insufficient to pass the merits test:

(1) A common intention that a house is to be shared as a family home does not shed any light on the intentions regarding the beneficial ownership of the property (per Lord Bridge in Lloyds Bank Plc v Rossett [1991] 1 AC 107). The present case was indistinguishable.

“The intention that a property should be a family home (whether or not “forever”) does not say anything about beneficial ownership of the property. Rather it focuses on a state of affairs and occupation.”

(2) The intention to enable the P family to live in the flat was given effect by the arrangement under which title to the lease of the flat (and, on the face of it, its beneficial ownership) remained with the tenant, FOL. The ability to occupy the flat was conferred by the purchase of shares in FOL. If (as contended) the flat was to be a home for life for the family (including P’s husband), and if that created a trust, then it was difficult to see why the trust involved a life interest for P only (and not, for example, P’s husband). In any event, if there had been a licence for life, it was difficult to see how such a licence would have bound the lender.

Accordingly, P’s application failed the merits test as having no real prospect of success and was dismissed.

Comments

This case involves an application by a third party (someone other than the lender and borrower) to be joined in mortgage possession proceedings, specifically by a person claiming a beneficial interest by way of constructive trust or proprietary estoppel.

This decision deals principally with the merits of the third party’s claimed interest and emphasises that a claim based on constructive trust or proprietary estoppel must establish more than a right of shared occupation of a family home, as this does not shed any light on the beneficial ownership of the property.

Take care with this, though. The decision turns, in part, on the ownership of the property being held through a family trust. Absent this distinguishing feature, there might be nothing to stop a third party from alleging a licence for life, which could certainly be given effect by way of proprietary estoppel.

What is usually more important to a lender (because it is something they may be able to control) is whether any alleged third-party interest is capable of taking effect as an overriding interest, which is binding on the lender. There is no analysis of this in this case – the claim failed at the first hurdle.

In practice, it is fairly difficult for third parties to succeed in an overriding interest claim:

(1) Remember that, for the purposes of Para 2, Sched 3, Land Registration Act 2002 (interest of a person in actual occupation), the person must be in occupation of the mortgaged property at the date of the mortgage, which will rarely be the case with purchase mortgages – possibly with re-mortgages.

(2) Even then, Para 2 is subject to exceptions: (a) the interest of a person of whom enquiry was made before the mortgage, who failed to disclose the claimed right when they could reasonably have been expected to do so, and (b) an interest belonging to a person whose occupation would not have been obvious on a reasonably careful inspection.

(3) Any claimed equitable interest may be overreached on a mortgage by at least two trustees of the legal estate.

(4) Where the property from which the claimed equitable interest is derived is purchased with the benefit of a mortgage, the claimed interest may be subordinated to the mortgage.

If there is any prospect of a third-party interest at the underwriting stage, most lenders will head the claim off with a form of consent or a deed of postponement.

There is a helpful summary of these and related issues in the brand-new edition of Atkin’s Court Forms (LexisNexis), Vol. 28(1), Mortgages, at paras. 109–112.

Incidentally, the court also noted that it is not an invariable practice to join in as an additional defendant every third party claiming an interest, with the judge stating: “In my judgment CPR 55 does not require every person to be joined who is in occupation of mortgaged property in relation to which the mortgagee seeks possession. A possession order operates against the world.” The judge did indicate, though, that he would hear further argument on whether it was necessary to join in P so that she would be bound by any determination the court made.