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Overreaching and overriding interests: Mortgage Express v Lambert

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02/09/2016

Like so many cases in recent years, the background to Mortgage Express v Lambert [1] involves fraud.  When the owner of a leasehold flat, Ms Lambert, got into financial difficulties, she fell prey to a sale and leaseback scam whereby she sold her property, at a significant undervalue, to two fraudsters.  While Ms Lambert continued to occupy, the fraudsters obtained a mortgage loan secured against the property at its true value and then made off with the proceeds.  When the lender sought possession, Ms Lambert claimed she was entitled to unravel her sale to the fraudsters on the basis that it was an unconscionable bargain.  She also claimed that she was entitled to receive her flat back free from the mortgage.

The Court of Appeal had to consider the legal nature of Ms Lambert’s right to set aside her sale of the flat on the basis that it was an unconscionable bargain; how such a right fitted into the system of land registration; and whether Ms Lambert’s right could be overreached in any event.

Law for lenders

The Court of Appeal undertook some academic analysis which will be of interest to lenders, which can be summarised as follows:

  • The law is clear that a right to set aside a transaction on the grounds of misrepresentation or undue influence is classified as an ‘equity’ [2]. There is no reason to suppose that a right to set aside an unconscionable bargain is any different, and so Ms Lambert had an equitable right that was recognised at law.
  • Section 116 of the Land Registration Act 2002 (LRA) provides that an equity is an interest that is capable of binding successors in title.
  • The general rule in registered conveyancing is that all interests and rights over a piece of land must appear on the register. Overriding interests are the exception to that rule, however, and may bind a successor in title despite not being registered.
  • Occupiers’ interests may be capable of overriding registered dispositions (such as mortgage charges) if the occupation is obvious on a reasonably careful inspection of the land or the buyer/mortgagee knows about the interest.
  • Overreaching is a process by which equitable rights in land which might otherwise have enjoyed protection on the occasion of a disposition are detached from the land and are transferred instead to monies paid in exchange for the sale/mortgage.

Court of Appeal decision

The Court of Appeal concluded:

  • Although Ms Lambert’s right was legally capable of binding successors in title, it did not amount to an overriding interest because when inquiry was made of Ms Lambert prior to completion of the mortgage, she did not disclose the fact that she was continuing in occupation. If an occupier does not reveal its rights when inquiries are made as part of a reasonable inspection, he or she cannot thereafter assert them.
  • In any event, the fraudsters in this case had been registered proprietors of the land and a valid mortgage transaction was completed [3] and so the requirements for overreaching were met.
  • Ms Lambert’s right was therefore not binding on the lender. Her interest had been overreached and had, thereby, become an interest in the loan proceeds (rather than an interest in the land itself).

WM Comment

This case clarifies, for the first time, that the right to set aside an unconscionable bargain is an equity that is, at least in principle, capable of being an overriding interest and of binding successors in title. As the Court of Appeal’s conclusion demonstrates, however, much will depend on the facts of the case, and an occupier’s rights will not override those of a subsequent registered chargeholder if those rights were not obvious or asserted upon a reasonable inspection.  Lenders will also be pleased with the confirmation provided in this case that overreaching of an equity can nevertheless occur if other necessary legal requirements are met.

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[1] [2016] EWCA Civ 555
[2] At its broadest sense, equity in English law means ‘fairness’.  The law of equity and equitable principles may, in some circumstances, be able to provide a fair solution where the common law or statute cannot.  Equity and equitable principles play a significant role in the law of mortgages, helping to balance the often-competing rights of mortgagee, mortgagor and occupier.
[3] pursuant to section 26 of the LRA and section 2 of the Law of Property Act 1925.