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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Birmingham Midshires Mortgage Services Ltd. v Sabherwal [1999] EWCA Civ 3042 (17 December 1999)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/1999/3042.html
Cite as: [1999] EWCA Civ 3042, (1999) 80 P & CR 256

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BAILII Citation Number: [1999] EWCA Civ 3042
Case No. CCRTF 1999/0734/B3

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON COUNTY COURT
(MR RECORDER ISAACS QC)

Royal Courts of Justice
Strand
London WC2
Friday 17th December 1999

B e f o r e :

LORD JUSTICE ROBERT WALKER
MR JUSTICE ALLIOTT

____________________

BIRMINGHAM MIDSHIRES MORTGAGE SERVICES LIMITED
Claimant/Respondent
AND:
SUDESH SABHERWAL
Defendant/Appellant

____________________

(Computer Aided Transcript of the Stenograph Notes of
Smith Bernal Reporting Limited, 180 Fleet Street,
London EC4A 2HD
Tel: 0171 421 4040
Official Shorthand Writers to the Court)

____________________

MR M BEAUMONT (Instructed by MD Jethwa & Co, 13 King Street, Southall, Middlesex) appeared on behalf of the Appellant
MR N JONES QC and MR P J KIRBY (Instructed by Eversheds, Fitzalan House, Fitzalan Road, Cardiff) appeared on behalf of the Respondent

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

  1. LORD JUSTICE ROBERT WALKER: This appeal raises yet again questions of priority as between a mortgage lender and an individual claiming an equitable interest in the family home. The principal issue before the judge was whether the decision of the House of Lords in City of London Building Society v Flegg [1988] AC 54 has been displaced by the enactment of the Trusts of Land and Appointment of Trustees Act 1996 ("the 1996 Act"). The trial judge, Mr Recorder Isaacs QC, sitting at the Central London County Court, had no hesitation in rejecting that argument. Nevertheless he granted permission to appeal, and in this court new arguments have been put forward for distinguishing Flegg.
  2. The appellant Mrs Sudesh Sabherwal ("Mrs Sabherwal") was born in 1936. She and her late husband, Mr Yash Paul Sabherwal ("Mr Sabherwal") were married in Kenya in 1954. They had two sons, Kanwal (born in 1956) and Sunit (born in 1958). The family came to England in 1967. Kanwal and Sunit ("the sons") were the original defendants in these proceedings brought by Birmingham Midshires Mortgage Services Ltd ("BMMS"). Mrs Sabherwal was later joined as the third defendant, on her own application.
  3. In her written witness statement and her oral evidence, which the judge accepted, Mrs Sabherwal described how she and her husband had worked hard to better their circumstances. Mr Sabherwal worked as a fork-lift driver for Nabisco at Welwyn. Mrs Sabherwal had a part-time job and then, as the sons got older, she also worked full-time for Nabisco. She seems to have been better at saving than her husband, whom she described as enjoying life to the limit.
  4. The couple had a flat at Hatfield from 1972 until it was compulsorily acquired in 1974. There was then an equity of about 3,750 in the flat and they bought a house at Welwyn, registered in their joint names, for 11,500 with a mortgage of 8,000. The Welwyn house was sold in 1980 and produced a net sum of about 24,500. At that stage Mr Sabherwal decided to go into business. He and his wife purchased freehold premises known as Handy Stores at Chalfont St Peter, consisting of a shop and a three-bedroom flat above. They paid 68,500 for the premises and another 11,000 for the stock. The necessary funds were raised from the net proceeds of the Welwyn house, a gift of 10,000 to Mrs Sabherwal from her mother, and a secured loan of 44,000 from Forward Trust.
  5. Mr and Mrs Sabherwal and the sons (who by 1980 had reached the ages of 24 and 22) lived together in the flat and worked together in the shop. Mrs Sabherwal said that the Handy Stores premises were acquired in the joint names of Mr Sabherwal and the sons, but the evidence of Mr Mukesh Radia, a solicitor who prepared a transfer of the premises in 1990, was that she too was a registered proprietor. The judge made no finding about this and it is not of critical importance.
  6. Mrs Sabherwal said that the business was quite successful. That seems to be borne out by the next move, which was the sale in 1984 of the Handy Stores premises and business for a net sum of 98,000 (after paying off the Forward Trust). Mr Sabherwal decided to go into the off-licence business and the family purchased freehold premises called AA Wine and Food at Gerrards Cross. The price was 160,000 plus 20,000 for the stock. 90,000 was paid in cash and 90,000 was provided by a secured loan from National Westminster Bank. The premises were transferred into the joint names of Mr Sabherwal and the sons. In 1985 the family bought a four-bedroomed house at Amersham for 67,500. There was a building society mortgage of 60,000 and the balance came from what was left of the net proceeds of the Handy Stores. The Amersham house was registered in the joint names of the sons.
  7. All this is background but it brings out some general points which seem not to have been fully reflected in the judgment under appeal. Mrs Sabherwal was plainly an important source of the family's growing prosperity, although after the sons were grown up she seems to have deferred to her husband in not insisting that she should be one of the proprietors in whose names any property was acquired. She said in her witness statement that she read very little English, and the judge accepted this, but she does not seem to have been lacking in intelligence or initiative; it was she who first opened a savings account in her own name when her husband was disinclined to save. Moreover, Mrs Sabherwal's contribution to the family's prosperity was reflected not only in the matrimonial home; it was also reflected in the off-licence business. That might have been material in relation to the issue of "manifest disadvantage" if it had received closer investigation.
  8. In March 1987 Mr Sabherwal died. Shortly afterwards came the purchase which is of most immediate relevance. The Amersham house was sold for 98,000, leaving 38,000 net, and there was purchased for 185,000 a substantial five-bedroomed house, 5 Moreland Drive, Gerrards Cross. There was a mortgage loan of 136,000 from Barclays Bank and the balance came from the net proceeds of the Amersham house and from savings. The new house was acquired in the joint names of the sons, with the usual restriction on a disposition by the survivor of them. By this time both sons were married and the new house was occupied by Mrs Sabherwal, the sons, their wives, and some grandchildren. Mrs Sabherwal's evidence was that the sons promised her, just before her husband's death, that she would always have a roof over her head and her pleadings relied on estoppel (among other things). But on any view Mrs Sabherwal must have had a significant equitable interest in the new house, and that was not in dispute at the trial.
  9. Mr Sabherwal died shortly before the surge in property prices at the end of the 1980s and the sons seem to have expanded into a variety of new enterprises, using a company called Sabherwal Enterprises Ltd ("Enterprises"). According to the witness statement of Mr Radia (a Harrow solicitor with no long-standing knowledge of the family) Enterprises had by 1990 borrowed from National Westminster Bank no less than 760,000 on the security of the Fernlea Retirement Home at Woodhall Spa and the AA Wine and Food premises at Gerrards Cross. Mr Radia says that he arranged for the transfer of the latter premises to Enterprises in 1990.
  10. In April 1990 the sons applied to BMMS (under its then name of Mortgage Services Funding) for a loan of 255,000 for the stated purpose of "capital raising for improvement and stock purchases for existing businesses". It is not clear whether that vague description prompted any closer inquiries. The application form disclosed an existing mortgage of 171,500 outstanding to Barclays Direct Mortgage. (This reflected a further advance of 36,000 obtained by the sons in 1989 for the extension of the house at Gerrards Cross). So the loan of 255,000 (made in two tranches on 24th and 26th July 1990) paid off the Barclays loan with a surplus of about 83,000. However, a completion statement produced by Mr Radia shows a combined refinancing operation which raised 780,000 from Mercantile Credit and 255,000 from BMMS, paid off mortgages and fees to a total of about 989,000, and left a balance of about 46,000. Mrs Sabherwal's evidence was that she did not know how the money was spent, and did not enquire about it.
  11. Mr Radia was instructed to act for BMMS in connection with the secured loan of 255,000. His written standing instructions stated (paragraph 5):
  12. "It is your responsibility to ensure that no one has or will obtain rights of occupation or any interest whatsoever in the proposed security in priority to or otherwise preventing the free exercise of the Company's rights as mortgagee of the property. A Form of Consent must be obtained from all adult occupiers of the property (other than the borrowers) and placed with the Title Deeds."
  13. Paragraph 16 stated:
  14. "Before the documentation is executed the contents should be explained and wherever possible, signatures should be witnessed by a solicitor."
  15. Mrs Sabherwal and the sons' wives (Mrs Jatinder Sabherwal and Mrs Bandna Sabherwal) did all sign two forms of consent (dated 24th and 25th July 1990) identifying the house and stating:
  16. "NOW I/We the undersigned being a person(s) who is/are in or may go into actual occupation of the Property hereby consent to the creation of a mortgage or charge over the Property to secure the advance (and such further advances) and undertake to the Company that such rights if any as I/we may have by way of overriding interest or otherwise in or over the Property shall be postponed and made subject to the rights and interests of the Company under its mortgage or charge.

    I/We confirm that the effect of this form has been explained and that I/we have been advised of my/our right to have independent legal advice on its effect."

  17. This was a standard printed form and was in no sense tailor-made for this particular situation. 'The Company' was BMMS under its then name of Mortgage Services Ltd. All the signatures appear to have been witnessed by Mr Radia, but the appearance is deceptive. In his witness statement Mr Radia stated (with no apparent shame) that he had not witnessed any of the signatures. He signed the forms on his own in his office. He had not met any of the signatories and he had given them no explanation or advice. Mrs Sabherwal's evidence was that her elder son produced the forms and said "Sign here" and that she did so because she trusted him.
  18. The sons fell into arrears under the legal charges and in 1993 BMMS took proceedings against them to enforce its security. The sons offered no defence but Mrs Sabherwal applied to be joined as a defendant and claimed to be entitled, by virtue of her actual occupation of the house, to an overriding interest under s 70(1)(g) of the Land Registration Act 1925. It was only in further and better particulars of her defence that she spelled out her interest as an equitable interest as a tenant in common under a trust for sale, or by estoppel. BMMS in its amended particulars of claim relied on (i) the overreaching effect of the legal charges; (ii) the form of consent signed by Mrs Sabherwal and the absence of notice, on the part of BMMS, of any right of Mrs Sabherwal to have the consent set aside; and (iii) subrogation to the rights of Barclays, the mortgagee paid off in 1990.
  19. The judge identified these as the three main issues in the case. He decided the first issue in favour of BMMS, and that concluded the case in favour of BMMS, but the judge would have been against BMMS on the other two issues. Mrs Sabherwal has appealed to this court on the overreaching point, and BMMS has put in a respondent's notice on the other two points (although subrogation now appears in a variant form; that is, subordination).
  20. Before the judge it was conceded that the situation was covered by the decision of the House of Lords in City of London Building Society v Flegg, unless their decision was in some way ousted by the enactment of the 1996 Act (which was brought into force on 1 January 1997). The facts in Flegg were that a married couple purchased for 34,000 a house for occupation by themselves and the wife's parents. The parents (the Fleggs) contributed at least 18,000 and the younger couple (the Maxwell-Browns) borrowed 20,000 on the security of the house, of which they were registered as joint proprietors (with no restriction on the register). The Fleggs (who thought that the borrowing was going to be 15,000) did not wish to be personally liable as mortgagors. Subsequently the Maxwell-Browns obtained further advances on the security of second and third charges. All the charges were discharged by a remortgage for 37,500 of which the Fleggs knew nothing. The Maxwell-Browns defaulted and the new mortgagee, the City of London Building Society, claimed possession and a declaration that its charge bound the Fleggs. The Fleggs relied on s 14 of the Law of Property Act 1925 and s 70(1)(g) of the Land Registration Act 1925.
  21. The House of Lords, reversing the Court of Appeal, decided for the building society and against the Fleggs, essentially because the Maxwell-Browns were trustees for sale who gave a valid receipt for the mortgage money, with the result that the equitable interests of the Fleggs attached to the money (and to the equity of redemption in the house): see the speech of Lord Templeman at pp 72D-74D and that of Lord Oliver at pp 84D-91D.
  22. That decision was followed and applied by this court in State Bank of India v Sood [1997] Ch 276, the further refinement in that case being that the legal charge in question was executed for the sole purpose of securing existing indebtedness, so that no capital moneys were actually received by the trustees for sale. Nevertheless, the charge had an overreaching effect on occupants in a position comparable to that of Mrs Sabherwal. Peter Gibson LJ said (at p 290):
  23. "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] AC 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."
  24. There has been further consultation and discussion as to problems of registration of title but (unless the 1996 Act has made a material change) no relevant legislative activity. The trend of the latest discussion appears from the Law Commission's consultative document, Land Registration for the Twenty-First Century (No 254, published in September 1998; paragraph 2.32 notes Flegg without comment).
  25. The judge gave ten reasons for concluding that the decision in Flegg has not been affected by the 1996 Act. Since that conclusion is not directly challenged in this court, at any rate on the grounds that the judge considered, it is sufficient to mention three of the most cogent of his reasons. First, the overreaching effect of the legal charges took place when they were executed in July 1990, and cannot be ousted by the coming into force of the 1996 Act over six years later. Second, the 1996 Act contains nothing to exclude the essential overreaching provision contained in s 2(1)(ii) of the Law of Property Act 1925. On the contrary, that provision is amended so as to meet the new terminology of the 1996 Act (see s 25(1) and Sch 3 para 4(1)) and so is in effect confirmed, with that new terminology, by the 1996 Act. Third, the abolition of the doctrine of conversion (by s 3 of the 1996 Act) is irrelevant for reasons stated by Lord Oliver in Flegg (see p 90G-H). However, the abolition of that doctrine does explain the amendment of s 27(1) of the Law of Property Act 1925, on which some reliance has been placed.
  26. Instead in this court Mr Marc Beaumont (for Mrs Sabherwal) has in his skeleton argument (in amplification of a very terse notice of appeal) sought to distinguish Flegg on two grounds. The first is based on proprietary estoppel. The second is based on Article 8 of the European Convention of Human Rights. The first of these grounds was not argued before the judge but this court has (perhaps over-indulgently) permitted the point to be argued, on the footing that no further findings of fact are required.
  27. On the facts of this case, Mrs Sabherwal plainly made a substantial financial contribution to all the properties successively owned by the family. She could rely on a resulting trust and had no need to rely on proprietary estoppel (if and so far as the two are, in the context of the family home, distinct doctrines: see the observations of Sir Nicolas Browne-Wilkinson V-C in Grant v Edwards [1986] Ch 638, 656). If she had made no financial contribution, but had nevertheless acted to her detriment in reliance on her sons' promises, she might have obtained (through the medium of estoppel rather than through the medium of a trust) equitable rights of a proprietary nature. Her actual occupation of the house would then have promoted those rights into an overriding interest. That, I think, is not conceded by counsel for the respondents but I assume that to be the case. On that basis, it would have been a remarkable result if those more precarious rights were incapable of being overreached, on a sale by trustees, under s 2(1)(ii) of the Law of Property Act 1925.
  28. Mr Beaumont has however contended for that result, citing what Lord Wilberforce said in Shiloh Spinners v Harding [1973] AC 691, at 721:
  29. "All this seems to show that there may well be rights, of an equitable character, outside the provisions as to registration and which are incapable of being overreached."
  30. Lord Wilberforce had just before referred to ER Ives Investment Ltd v High [1967] 2 QB 379. In that case a boundary dispute between neighbours had been settled by an informal agreement including the grant of a right of way. The agreement about the right of way was never completed by a deed of grant, and was never registered. The Court of Appeal held that it was binding despite the lack of registration. Similarly, Shiloh Spinners v Harding was concerned with an equitable right of entry for enforcement of a covenant arising in what Lord Wilberforce called a "dispute ... of a commonplace character between neighbours".
  31. Equitable interests of that character ought not to be overreached, since they are rights which an adjoining owner enjoys over the land itself, regardless of its ownership from time to time. The principle is in my view correctly stated in Megarry and Wade, The Law of Real Property 5th ed p 409:
  32. "In fact the only examples of such equities likely to occur are commercial (as opposed to family) interests, which it is absurd to speak of overreaching. Two instances are an equitable right of way which is yet not an equitable easement, and an equitable right of entry to secure performance of a covenant, and there are probably others. To overreach such interests is to destroy them ..."
  33. The footnotes to this passage refer to ER Ives Investment Ltd v High and Shiloh Spinners v Harding (cases which were cited to the House of Lords in Flegg - see especially counsel's argument at p 63 - but are not referred to in any of the speeches of their Lordships). The essential distinction is, as the authors of Megarry and Wade note, between commercial and family interests. An equitable easement or an equitable right of entry cannot sensibly shift from the land affected by it to the proceeds of sale. An equitable interest as a tenant in common can do so, even if accompanied by the promise of a home for life, since the proceeds of sale can be used to acquire another home.
  34. Mr Beaumont has also argued that, although in Grant v Edwards the Vice-Chancellor regarded interests in the family home created by equitable estoppel or by a constructive trust as closely similar, if not interchangeable, his remarks do not apply to a resulting trust arising from a monetary contribution. This is an area of the law in which the terminology is unfortunately far from uniform, but I do not accept that the Vice-Chancellor's remarks were limited in that way. On the contrary, immediately after his reference to proprietary estoppel he said (see [1986] Ch at 657H-658A):
  35. "Identifiable contributions to the purchase [price] of the house will of course be an important factor in many cases."
  36. Similarly, in Lloyds Bank v Rosset [1991] 1 AC 107 Lord Bridge (in a very well-known passage at pp 132-3) referred to "direct contributions to the purchase price by [a party] who is not the legal owner", as readily justifying the creation of a constructive trust. Such a trust, however labelled, does not then leave room for a separate interest by way of equitable estoppel: compare the remarks of Morritt LJ in Lloyds Bank v Carrick [1996] 4 AER 630 at p 639C-E. To do so would cause vast confusion in an area which is already quite difficult enough. The confusion is avoided if what Lord Wilberforce said in Shiloh Spinners v Harding is limited, as in my judgment it must be, to some unusual types of equitable interest arising in commercial situations. In this type of family situation, the concepts of trust and equitable estoppel are almost interchangeable, and both are affected in the same way by the statutory mechanism of overreaching, the substance of which is not affected by the 1996 Act.
  37. In these circumstances I do not find it necessary to consider how far the judge's findings in this area (which were largely limited to a general acceptance of Mrs Sabherwal's evidence) would establish the necessary conditions for proprietary estoppel. I assume in favour of Mrs Sabherwal that they would do so.
  38. Mr Beaumont's other point is on Article 8 of the European Convention on Human Rights, which provides:
  39. "1. Everyone has the right to respect for his private and family life, his home and his correspondence.

    2. There shall be no interference by a public authority with the exercise of this right except such as is in accordance with law and is necessary in a democratic society ... for the protection of the rights and freedoms of others."

  40. Article 8 was referred to by this court, in the context of a mortgage case, in Albany Home Loans v Massey [1997] 2 AER 609 at p 612. Schiemann LJ observed that it was not yet in force as part of our domestic law, but he found in it a clue to the problem posed in that case. I do not see that it gives Mr Beaumont any assistance in this case. The Human Rights Act 1998 is not yet in force. BMMS is not a public authority. The judge's order was made in accordance with law and it was necessary for the protection of BMMS's rights as a secured lender. Mr Beaumont submitted that because of the imminent incorporation into domestic law of the Convention, Article 8 should influence the construction of s 2 of the Law of Property Act 1925, but with all respect to Mr Beaumont there is nothing in that argument.
  41. In my judgment, therefore, this appeal must be dismissed. It is not in the circumstances necessary or appropriate to deal at length with the issues raised in the respondent's notice (on which the court has had copious skeleton arguments, but has heard no oral argument) but I will add a few comments.
  42. The relationship between an adult son and a mother in her mid-fifties does not give rise to any general presumption of undue influence exercisable by the former over the latter. Nor, for reasons already touched on, is this obviously a case in which it was to Mrs Sabherwal's manifest disadvantage to allow the family home to be used to provide further capital for the family businesses, since she must (at least until 1989) have had a substantial stake in them. (There does not seem to have been any evidence before the court as to whether Mrs Sabherwal was a shareholder in Enterprises, which latterly owned the off-licence at Gerrards Cross and the residential home at Woodhall Spa). But, if the judge was right in treating these points as having been formally or informally conceded by BMMS, then his conclusions (as to BMMS having notice of the absence of Mrs Sabherwal's true and informed consent) seem to me unassailable.
  43. As regards subrogation (or subordination) the developing authorities (in particular Boscawen v Bajwa [1996] 1 WLR 328 and the decision of the House of Lords in Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221) show that this type of subrogation operates as a restitutionary remedy to prevent a defendant's unjust enrichment through the claimant's failure to obtain a valid (or fully valid) security on an occasion when an earlier, valid security is discharged. I see no reason to suppose that Mrs Sabherwal's equitable interest was not fully bound by the original security for 136,000 granted to Barclays, or in respect of the further advance of 36,000 obtained in 1989 for improvements to the family home. I cannot agree with the judge's view that the circumstances in which BMMS might have failed to obtain a fully valid security would require the court, or give the court a discretion, to withhold restitutionary relief: see Banque Financiere especially at pp 227 (Lord Steyn), 235 (Lord Hoffmann) and 242-3 (Lord Hutton). But in the absence both of clear findings by the judge and, more particularly, of full argument on this point, either below or in this court, it is better to express no definite view either on subrogation or on subordination (as to which see Equity & Law Home Loans Ltd v Prestidge [1992] 1 WLR 137).
  44. I would therefore dismiss this appeal.
  45. MR JUSTICE ALLIOTT: I agree.
  46. ORDER: Appeal dismissed with costs, not to be enforced without the leave of the court. Stay on possession lifted. Permission to appeal to the House of Lords refused.

    (Order not part of approved judgment)


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