(1) ALAN JOHN DEAKIN (2) JILLIAN DEAKIN v (1) IAN DUDLEY CORBETT (2) ELAINE JUNE CORBETT (3) HALIFAX PLC [2002] EWCA Civ 1849

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE, CHANCERY DIVISION
BRISTOL DISTRICT REGISTRY
(His Honour Judge Weeks QC)
[2002] EWCA Civ 1849Case No Case No:CHANI B2 2002/0532Venue Royal Courts of Justice, Strand,, London, WC2A 2LL
Between
(1) ALAN JOHN DEAKIN (2) JILLIAN DEAKINAppellants(1) IAN DUDLEY CORBETT (2) ELAINE JUNE CORBETT (3) HALIFAX PLCRespondents
Before
Lord Justice SchiemannLord Justice Scott BakerMr JUSTICE PUMFREYThomas Jefferies (instructed by Wards) for the AppellantsPhilomena Harrison (instructed by Bevan Ashford) for the first and second RespondentsNeil Levy (instructed by Hammond Suddards Edge ) for the third RespondentDate 18 December 2002
[1]Mr Justice Pumfrey Introduction The appellants, to whom I shall refer as 'the Deakins', appeal with the permission of HHJ Weeks QC sitting as a judge of the Chancery Division against his judgment delivered on 17 October 2001, setting aside the sale by the third Respondent ('the Halifax') as mortgagee in possession of Yew Tree Farm, Sand, Wedmore, Somerset to them. The claimants, to whom I shall refer as 'the Corbetts', allege that the sale was fraudulent or at an undervalue. The learned judge ordered the Register to be rectified to reflect his order, and made an order for possession of Yew Tree Farm in favour of the Halifax and for immediate sale.[2]Although the judge's finding that the sale to the Corbetts was at an undervalue was challenged in the grounds of appeal and in the appellants' skeleton argument, Mr Jefferies, recognising the difficulties confronting him in pursuing a challenge to the judge's finding of fact, did not pursue the point with any enthusiasm, and it is now accepted that the judge's finding that the sale took place at an undervalue must stand.[3]With that introduction, I turn to the facts of the case. The judge sets out the events fully and with great care, and I will only set out so much of the facts here as make this judgment comprehensible.[4]The Corbetts purchased Yew Tree Farm in 1983. It then consisted of a site of about 1.5 acres fronting a quiet country lane, with(1) a 250-year-old farmhouse abutting the lane(2) a barn and outbuildings behind the farmhouse, later converted by the Corbetts to a house called Little Sneyd; and(3) a paddock of about 1 acre, which the Corbetts still own. Yew Tree Farm, Little Sneyd and an adjoining property share access over a single shared drive from the lane. Until 1992, the Corbetts lived in Yew Tree Farm and ran a bed and breakfast business. Mr Corbett also ran a printing business from a caravan parked on the property.[5]In 1987, the greater part of the property excluding the outbuildings was mortgaged to Western Trust and Savings Limited to secure a loan of £75,125, which was used to finance the conversion of Little Sneyd. Mr and Mrs Corbett appear to have run into difficulties almost immediately, since in February 1989 they put the whole property, except the paddock and another strip providing access to the paddock from the lane on the market. They found no takers, and ultimately they raised the funds to discharge the loan by remortgaging the farmhouse and a small garden to the Halifax. The loan proposal was countersigned by Mr Deakin, then an employee of the Halifax at its branch in Weston-super-Mare and the transaction was completed on 23 March 1990. The loan secured was £160,000, of which £82,163 went to redeem the existing mortgage. The interest rate was 13.5% per annum over the first two years, and the monthly repayment rate was £1,995. The rest of the money was used for Little Sneyd, and a further advance of £25,000 on the same security was obtained on 20 August 1990, raising the total indebtedness to £185,000 less the capital element of the repayments which the Corbetts made from March 1990. The repayment rate was then set at £2,286 per month, which the Corbetts knew they could not meet out of income. In January 1991 they borrowed a further £18,000 from Consumer Loans Co, and executed a further mortgage over 'Yew Tree Farm, Sand, Wedmore' on 13 February 1991 in favour of Consumer Loans Co. They applied £4,564 of the loan obtained from Consumer Loans in paying the December 1990 and January 1991 instalments of the principal loan, and then defaulted. By the following January the total indebtedness was £210,025.13.[6]The Halifax's Mortgage Conditions then current were the 1988 edition, and the express power of sale is contained clauses 12 and 13:
'12. The Redemption Money shall become immediately payable to the Society (a) if there is a default in the payment of any two Monthly Payments or for two months in the payment of any moneys payable under the Mortgage these Conditions or the Rules… 13. At any time after the Redemption Money has become immediately payable the Society may without any previous notice to or concurrence on the part of the Borrower: (a) take possession of the Property (b) exercise all the powers conferred on mortgagees by the Law of Property Act 1925 with all the incidences of such powers but so that the power of sale may be exercised whether the Society shall be in possession or not and without the restrictions imposed by Section 103 of that Act (c) … 18. The Society's powers contained in the Mortgage or these Conditions are in addition and without prejudice to and not in substitution for all other powers and remedies of the Society under the Rules or by statute.'
[7]By 6 September 1991 it was clear to the Corbetts that possession proceedings were imminent, and their solicitor secured the agreement of the Halifax to postpone action for six months to enable the Corbetts to try to sell the property themselves. They failed to obtain a sale and ultimately the order for possession was made in the Weston-super-Mare County Court on 23 June 1992, possession to be given by 21 July. Their agents, Borough Mall, had by then reduced the asking price to £195,000. The Halifax did not take steps to execute the order until late in the year, by which time a single tentative offer of £150,000 had been obtained. The warrant for possession was obtained and was enforceable on 19 January 1993. Possession was obtained on 19 January 1993, and the Halifax formally instructed another firm of agents, Michael Gillett, as selling agents, having informally approached them some days earlier. The Halifax's standard terms of engagement including a provision that 'under no circumstances may staff of the Halifax group of companies or agent's staff or their families purchase a property in possession'.[8]Two valuations of the property were obtained at this stage. The first, from Mr Dunscombe, a partner in Michael Gillett, was for a value after necessary repairs of £133,000 and an asking price in present condition of £137,000. The second, from Mr Hawthorne (an in-house valuer employed by the Halifax) valued the property at £142,000 with an asking price of £149,950. The Halifax's South East Property Unit (referred to as 'SEPU') considered the valuations and decided that the asking price should be £145,000 and the minimum price £135,000. On the 9 February 1993 the Halifax gave instructions to Michael Gillett to start marketing the property. Particulars were prepared by Mrs Balson, the Wedmore manager of Michael Gillett. The amount outstanding was now about £236,000.[9]During this period, the Corbetts decided to put Little Sneyd, which appears to have been unencumbered apart from the mortgage to Consumer Loans Co, on the market with a view to paying off the Halifax loan with the proceeds and retaining Yew Tree Farm. They found a potential purchaser, but the matter proceeded slowly because of uncertainty over the boundaries of Little Sneyd and the extent of the Halifax's charge.[10]The Deakins had been on Michael Gillett's books since 1992. I take the account of what then happened from the judgment:
'Michael Gillett had kept a file on Mr Deakin with his address and telephone number in Wedmore and a work number, which was stated on the file to be a Halifax number. He had viewed several properties and made an offer on one called The Coach House, which did not proceed, in the previous year. On 2 February 1992 he was recorded as still looking, and on 8 February he went to view a house in Theale. His limit was recorded as £160,000 on the file. On 11 February 1992 Mrs Balson took Mr Deakin and his wife and mother to see Yew Tree Farm. Mr Deakin has given different versions of the subsequent events on different occasions and I am not able to accept his evidence except where independently verified. Where it conflicts with that of Mrs Balson or Mr Gillett I prefer the latter. There is, however, no particular reason why Mr Deakin should have remembered Mr and Mrs Corbett's mortgage application in 1990 or been aware at this stage that the property was a Halifax repossession. It was immediately apparent to Mrs Balson that the Deakins liked the property very much. She says they 'fell in love with it', although that is not the phrase they say they would have used. Mr Deakin said he made an immediate offer for £140,000 in writing. Mrs Balson cannot recall seeing such an offer and no copy of the document has been produced. She agrees, however, that the Deakins offered £140,000 straight away. She did not realise that Mr Deakin worked for the Halifax. … I find that Stephanie Balson told Michael Gillett that Mr Deakin had offered £140,000 for Yew Tree Farm. Mr Gillett was on nodding terms with Mr Deakin and knew that he worked for the Halifax. He told Stephanie Balson that Mr Deakin, as a Halifax employee, should not be purchasing a property repossessed by the Halifax. They agreed that one of them should speak to him. Either Mr Gillett or Mrs Balson did so, and Mr Deakin withdrew his offer. He was, however, quite determined to buy the property and over the weekend he devised a plan to buy it in his uncle's name. His uncle, Mr Marples, lived in Sheffield … …on 15 February 1993, Mr Deakin, or someone at his instigation, rang Stephanie Balson and made an offer for the property. Her note of 15 February says that "Mr A Marples offered £140,000", and gives his address and phone number in Sheffield. Mrs Balson was not stupid and knew that Mr Marples had not seen the property. She suspected, or realised, that Mr Deakin was using Mr Marples's name to circumvent the Halifax Rules.'
[11]The judge found that the matter was raised with Mr Deakin again by Michael Gillett, who was told by Mr Deakin that the latter had his line manager's approval for the purchase.[12]There were further complications in the sale of Little Sneyd, which did not have the benefit of any easement permitting access over the land which appeared to form part of the Halifax's security and whose boundary was in any case uncertain. The SEPU (which is located in Southampton) recommended a sale to Mr Deakin at the offer price having regard to the uncertainty in boundaries, and at the same time appears to have taken steps to make the sale of Little Sneyd difficult, so that the problems of boundaries and access could be overcome while it remained the Corbetts' property. A rival purchaser for Yew Tree Farm, Mr Shell, had also appeared on the scene, who consistently offered £145,000 but whose offer was never accepted, largely it would seem in consequence of Mrs Balson's failure to recommend it. The Halifax had a rule that an offer had to be 5% better to displace an existing firm offer, and the Shells were never told that if they wished their offer to be considered it would have to be £147,000 or above.[13]By 20 July 1993, when contracts were exchanged in respect of Yew Tree Farm, the Shells had walked away because their offer of £145,000 had not been accepted. The intending purchaser of Little Sneyd had also abandoned the transaction, and the question of boundaries had finally been resolved. The price was £140,000 and the purchaser was Mr Marples. In a back-to-back transaction, that took place on the same day, Mr Marples sold to Mr Deakin. Mr Deakin paid two lots of stamp duty on the transaction. On 12 November 1993, the Deakins were registered as first proprietors of Yew Tree Farm subject to a first charge in favour of the Abbey National under title number ST103445.[14]The Deakins did not go into occupation immediately, preferring to stay at their old home in Wedmore until certain works were done. The Corbetts stayed in Little Sneyd. Mrs Corbett got hold of a MIRAS form sent to Mr Deakin at Yew Tree Farm, and showed it to her mortgage broker, who complained to the Halifax. The allegation, as advanced by the Corbetts' adviser, a licensed conveyancer called Mr Stait, was as follows, as reported by the Halifax:
'…we have sold the …property as mortgagee at an under-value to an employee of the Society. There is also an allegation that the Society frustrated the sale of an adjoining property (not in the mortgage) thereby preventing the borrowers from clearing off the arrears and avoiding a sale of our mortgaged property. Mr Stait says that the property was sold to a Mr Alan John Deakin who works at one of our Bristol offices. He has in his possession a copy of an Abbey National completion letter addressed to the property and a copy of Mr Deakin's MIRAS form. He also says that local workmen confirmed that they were carrying out work at the property for Mr Deakin. Mr Stait does not have a copy of the statutory post-mortgagee in possession notice which we will have served on the borrowers. We have been in correspondence with Dibb Lupton, who acted in the sale, who say that the buyer was Mr Alan Marples. The property was sold by some local agents, Gilletts of Wedmore, who he knows refused a higher offer for the property after the sale by the Society at £140,000 had been agreed. The sale was completed, apparently on 10 August.'
[15]Thus the battle lines between the Deakins and the Corbetts, now close neighbours, were drawn. After an investigation, Mr Deakin was punished by the Halifax for his actions, but was not dismissed. The Halifax took no steps to set the sale to him aside.[16]In 1993 and 1994 the Deakins carried out certain works on Yew Tree Farm. They were unsuccessful in selling their old house in Wedmore, and contemplated selling Yew Tree Farm. On 13 October 1994 a letter before action was sent to the Halifax by the Corbetts' then solicitors. The Halifax's response was found by the judge not to be frank, but it seems to me that this is immaterial. A Writ was eventually issued on 29 May 1996, followed by a Statement of Claim on 13 March 1997. The Defence was served by the Deakins and a Defence and Counterclaim served by the Halifax in November. Neither the Corbetts nor the Deakins have sold their respective properties, with the consequence that over the whole period of this dispute they have remained neighbours. The judgment below[17]Before the judge, the Corbetts did not pursue their claim against the Halifax in respect of Little Sneyd (the sale of which was alleged to have been impeded by the Halifax) and advanced their claim against the Deakins and the Halifax on two bases, fraud and sale at an undervalue. The material findings of the learned judge may be summarised as follows: i) Mr Deakin, an employee of the Halifax, deceived the Halifax into selling to him, by interposing Mr Marples, as a nominee purchaser. If the Halifax had known of Mr Deakin's involvement, it would not have sold to him. ii) Mr Deakin was not employed by the Halifax in any manner connected with the sale, and thus the sale could not be set aside on the basis of Farrar v Farrars Ltd (1888) 40 Ch D 395 . iii) The decision to accept the offer made by Mr Deakin acting through Mr Marples was made by the employees of the Halifax in total ignorance of Mr Deakin's involvement. iv) The Halifax's local agents (Michael Gillett and Stephanie Balson) were aware that Deakin was involved and that he would not be entitled to purchase according to the Halifax's own rules but they accepted his story that he had cleared the purchase with his management. They acted without dishonesty or improper motive. v) The best price reasonably attainable for Yew Tree Farm was its open market value, which was £160,000 at the relevant time. vi) If the Halifax had sold to the disappointed would-be purchasers (the Shells) for £145,000 there would have been no undervalue since the margin on the valuation was ±10%. vii) The Deakins were not purchasers 'in good faith' within the meaning of the definition of 'purchaser' in s 205(1)(xxi) of the Law of Property Act 1925, and could not, therefore, take the benefit of section 104 LPA.[18]The judge rejected a submission that he was bound by the decision of the Court of Appeal in Property & Bloodstock Limited v Emerton [1968] 1 Ch 94 to hold that damages was the only remedy for a mortgagor in the Corbetts' position, but that 'the remedies should be adjusted to fit the circumstances of the case'. He therefore set aside the sale to the Deakins. His reasoning was as follows. 'In the present case, the mortgagee sold at an under-value in breach of its duty. It does not, I think, make any difference whether the duty was statutory or equitable. The under-value was small, but the size of the under-value is significant only as an indicator of the presence or absence of bad faith on the part of the vendor. There was therefore a breach, on any view, and the power was wrongly exercised.' Having quoted a passage from the then current edition of Emmett on Title (a passage which no longer appears) the judge assimilated the rights of a purchaser from a mortgagee in possession selling pursuant to his statutory power under section 101 LPA 1925 to that of a mortgagee in possession selling pursuant to an express power contained in the mortgage:
'In principle, a purchaser from any vendor who wrongly exercises a power of sale will get a good title if he is a bona fide purchaser for value without notice of the breach. The sale to Mr Marples was made under an extension of the statutory power. Whether or not that qualifies as an exercise of an express or a statutory power, the rights of Mr Marples and Mr Deakin cannot, I think, be any greater than those conferred by section 104 of the Law of Property Act 1925…'
[19]The judge referred to the protection conferred on purchasers by section 104, and turned to the statutory definition of 'purchaser' contained in section 205(1)(xxi) of the 1925 Act. Having considered the well-known observations of Lord Wilberforce in Midland Bank v Green [1981] AC 513 on the meaning of the words 'bona fide' or 'good faith' in this context, he continued:
'Mr Deakin was a purchaser for valuable consideration. In my judgment, he was not a purchaser in good faith. He acquired title by deceiving the vendor into believing that another person was the true purchaser and he knew the vendor would not have sold to him if he had disclosed the true facts. It is true that the Corbetts will gain more from setting aside than they have lost by the undervalue. But this arises from the increase in house prices since 1990. As between the Deakins and the Corbetts, I think it is fair that this increase should accrue to those who bought the house legitimately in 1983 rather than those who bought it dishonestly in 1993. In those circumstances, in my view, the justice of the case requires that the sale be set aside on terms.'
[20]The principal question which arises on this appeal is thus whether the sale to the Deakins was liable to be set aside, not because the Deakins or the Halifax knew or should have known of the undervalue, but because the Deakins had deceived the Halifax in selling to them rather than to somebody else. I shall consider the judge's reasons summarised above in more detail in considering this question. The powers and duties of the mortgagee[21]It is convenient to start with the statutory power of sale and the provisions contained in section 104 for the protection of the purchaser, as the express powers of sale in this case are drafted by reference to them. By section 101 of the Law of Property Act 1925 '101 Powers incident to estate or interest of mortgage (1) A mortgagee, where the mortgage is made by deed, shall, by virtue of this Act, have the following powers, to the like extent as if they had been in terms conferred by the mortgage deed, but not further (namely):— (i) A power, when the mortgage money has become due, to sell, or to concur with any other person in selling, the mortgaged property, or any part thereof, either subject to prior charges or not, and either together or in lots, by public auction or by private contract, subject to such conditions respecting title, or evidence of title, or other matter, as the mortgagee thinks fit, with power to vary any contract for sale, and to buy in at an auction, or to rescind any contract for sale, and to re-sell, without being answerable for any loss occasioned thereby; …'[22]Section 104 provides protection for a purchaser from a mortgagee:
'(1) A mortgagee exercising the power of sale conferred by this Act shall have power, by deed, to convey the property sold, for such estate and interest therein as he is by this Act authorised to sell or convey or may be the subject of the mortgage, freed from all estates, interest, and rights to which the mortgage has priority, but subject to all estates, interests, and rights which have priority to the mortgage. (2) Where a conveyance is made in exercise of the power of sale conferred by this Act, or any enactment replaced by this Act, the title of the purchaser shall not be impeachable on the ground— (a) that no case had arisen to authorise the sale; or (b) that due notice was not given; or (c) where the mortgage is made after the commencement of this Act, that leave of the court, when so required, was not obtained; or (d) whether the mortgage was made before or after such commencement, that the power was otherwise improperly or irregularly exercised; and a purchaser is not, either before or on conveyance, concerned to see or inquire whether a case has arisen to authorise the sale, or due notice has been given, or the power is otherwise properly and regularly exercised; but any person damnified by an unauthorised, or improper, or irregular exercise of the power shall have his remedy in damages against the person exercising the power. (3) A conveyance on sale by a mortgagee, made after the commencement of this Act, shall be deemed to have been made in exercise of the power of sale conferred by this Act unless a contrary intention appears. '
[23]The mortgagee is not a trustee of his power of sale ( Kennedy v. De Trafford [1897] AC 180 , H.L.).. The purpose of the power of sale is to enable the mortgagee to realise his security in the event of a default by the borrower. The scope of the power was described (as

the judge rightly said) by Robert Walker LJ in Yorkshire Bank v Hall [1999] 1 WLR 1713 at page 1728:

'…the bank relied on principles stated by the Privy Council in the well known cases of China and South Sea Bank Ltd. v. Tan Soon Gin (alias George Tan) [1990] 1 AC 536 and Downsview Nominees Ltd. v. First City Corporation Ltd. [1993] AC 295 and by the House of Lords in National Bank of Greece S.A. v. Pinios Shipping Co. No. 1 [1990] 1 A.C. 637. Those cases together establish or reaffirm that a mortgagee's duty to the mortgagor or to a surety depend partly on the express terms on which the transaction was agreed and partly on duties (some general and some particular) which equity imposes for the protection of the mortgagor and the surety. The mortgagee's duty is not a duty imposed under the tort of negligence, nor are contractual duties to be implied. The general duty (owed both to subsequent encumbrancers and to the mortgagor) is for the mortgagee to use his powers only for proper purposes, and to act in good faith: see the Downsview case, at p. 317. The specific duties arise if the mortgagee exercises his express or statutory powers: see the Downsview case, at p. 315. If he exercises his power to take possession, he becomes liable to account on a strict basis (which is why mortgagees and debenture holders operate by appointing receivers whenever they can). If he exercises his power of sale, he must take reasonable care to obtain a proper price.'
[24]At the time the sale to Mr Marples and to the Deakins took place, an express duty was placed on building societies by the Building Societies Act 1986 by virtue of section 13(7) and the Fourth Schedule:
'1.—(1) Where any land has been mortgaged to a building society as security for an advance and a person sells the land in the exercise of a power (whether statutory or express) exercisable by virtue of the mortgage, it shall be his duty— (a) in exercising that power, to take reasonable care to ensure that the price at which the land is sold is the best price that can reasonably be obtained…'
This provision has now been repealed but it is not suggested that the scope of the duty has changed.[25]Between contract and completion, the position is described in Waring v London & Manchester Assurance Co [1935] Ch 310, where in a passage subsequently approved by the Court of Appeal in Property & Bloodstock Limited v Emerson [1968] 1 Ch 94, Crossman J said this:
'The only effect of the conveyance is to put the legal estate entirely in the purchaser: that follows from s. 104, sub-s. 1, of the Law of Property Act, 1925, which provides that a mortgagee shall have power to convey the legal estate; and the whole legal estate can be conveyed free from all estates, interests, and rights to which the mortgage has priority. Sect. 104, sub-s. 2, upon which also counsel for the plaintiff relied, does not seem to me to affect the question at all. Its purpose is simply to protect the purchaser and to make it unnecessary for him, pending completion and during investigation of title, to ascertain whether the power of sale has become exercisable. Of course, if the purchaser becomes aware, during that period, of any facts showing that the power of sale is not exercisable, or that there is some impropriety in the sale, then, in my judgment, he gets no good title on taking the conveyance. The result in the present case is, in my judgment, that the sale effected by the contract, assuming, for the moment, that there is no objection to it on any other ground, binds the plaintiff, and that it is too late after the sale for him to tender the mortgage money and become entitled to have the property reconveyed to him. A second point taken by counsel for the plaintiff is that the sale, considered as a pending sale, cannot be allowed to stand because it was made at a gross under-value, an under-value which would entitle the plaintiff, as mortgagor, to have it set aside. I do not want to go through all the evidence again. After having gone through the evidence of the four years between the date of the mortgage and the date of the contract, I can find no evidence showing anything like lack of good faith in the company's conduct with regard to the sale. The law, as stated by Kay J. in Warner v. Jacob 20 Ch D 220, is perfectly clear. The learned judge there says: ".... a mortgagee is strictly speaking not a trustee of the power of sale. It is a power given to him for his own benefit, to enable him the better to realize his debt. If he exercises it bona fide for that purpose, without corruption or collusion with the purchaser, the Court will not interfere even though the sale be very disadvantageous, unless indeed the price is so low as in itself to be evidence of fraud."'
[26]It would seem to follow from this that a completed sale by a mortgagee is not liable to be set aside merely because it takes place at an undervalue. Impropriety is a prerequisite, and section 104(2) makes it clear that the purchaser is not protected if he has actual knowledge of the impropriety. But if the purchaser has no notice of the impropriety, then on the face of it he takes free. Thus, the completed sale by a mortgagee pursuant to his statutory power is vulnerable only if the purchaser has knowledge of, or participates in, an impropriety in the exercise of the power.[27]In Property & Bloodstock v Emerson (above) Danckwerts LJ summarised the position as follows:
'The actual decision of Crossman J. in Waring's case was: (1) that a mortgagee's exercise of his power under section 101(1)( i ) of the Act of 1925 to sell the mortgaged property by public auction or private contract is binding on the mortgagor before completion unless it is proved that he exercised it in bad faith; and (2) that the fact that a contract for sale was entered into at an undervalue is not by itself enough to prove bad faith.'
[28]Moving on to the position of Mr Deakin himself, one starts with the proposition that a sale by the mortgagee to his employee is not necessarily improper, but the burden is on the mortgagee to satisfy the court of the propriety of the transaction. In Farrar v Farrars Limited (1888) 40 Ch D 395 , Lindley LJ said, in a passage quoted by the judge, that 'The other ground relied upon was of a much more serious character. It was alleged by the Plaintiffs in their statement of claim that the sale was fraudulent and collusive and at an undervalue. Mr. Justice Chitty decided that this allegation was not proved, and he gave judgment for the Defendants. The Plaintiffs on appeal did not question the view of the Judge that there was no fraudulent sale at an undervalue, but they contended that fraud or no fraud, undervalue or no undervalue, the sale could not stand, inasmuch as it was in substance a sale by a mortgagee to himself and others under the guise of a sale to a limited company. If this proposition were true the sale could not stand as against the mortgagor. It is perfectly well settled that a mortgagee with a power of sale cannot sell to himself either alone or with others, nor to a trustee for himself: … ; nor to any one employed by him to conduct the sale: … . A sale by a person to himself is no sale at all, and a power of sale does not authorize the donee of the power to take the property subject to it at a price fixed by himself, even although such price be the full value of the property. Such a transaction is not an exercise of the power, and the interposition of a trustee, although it gets over the difficulty so far as form is concerned, does not affect the substance of the transaction. A sale by a person to a corporation of which he is a member is not, either in form or in substance, a sale by a person to himself. To hold that it is, would be to ignore the principle which lies at the root of the legal idea of a corporate body, and that idea is that the corporate body is distinct from the persons composing it. A sale by a member of a corporation to the corporation itself is in every sense a sale valid in equity as well as at law. There is no authority for saying that such a sale is not warranted by an ordinary power of sale, and in our opinion, such a sale is warranted by such a power, and does not fall within the rule to which we have at present referred. But although this is true, it is obvious that a sale by a person to an incorporated company of which he is a member may be invalid upon various grounds, although it may not be reached by the rule which prevents a man from selling to himself or to a trustee for himself. Such a sale may, for example, be fraudulent and at an undervalue or it may be made under circumstances which throw upon the purchasing company the burden of proving the validity of the transaction, and the company may be unable to prove it. Fraud in the present case is not now alleged; it was alleged in the Court below, and was then clearly disproved. But, for reasons which will appear presently, the circumstances attending the sale were such as, in our opinion, throw upon the company the burden of sustaining the transaction. The circumstances alluded to are shortly as follows:- Mr. John Riley Farrar was a solicitor, he was one of three mortgagees with a power of sale, he acted for his mortgagees. He sold to a company, more or less promoted by himself, in which he had a substantial interest as a shareholder, and whose solicitor he was. Such a transaction has a suspicious appearance, and at the time of the sale there was apparently such a conflict of interest and duty on the part of Mr. Farrar , and such notice to the company of that conflict, as to throw upon the company the burden of upholding the sale. But the sale cannot be set aside on the simple ground that Mr. Farrar was a trustee for sale, and was a promoter of and shareholder in the company which purchased from him. It is necessary to see what his duties to his mortgagors were, and what he really did. A mortgagee with a power of sale, though often called a trustee, is in a very different position from a trustee for sale. A mortgagee is under obligations to the mortgagor, but he has rights of his own which he is entitled to exercise adversely to the mortgagor. A trustee for sale has no business to place himself in such a position as to give rise to a conflict of interest and duty. But every mortgage confers upon the mortgagee the right to realize his security and to find a purchaser if he can, and if in exercise of his power he acts bonâ fide and takes reasonable precautions to obtain a proper price, the mortgagor has no redress, even although more might have been obtained for the property if the sale had been postponed:…'[29]Farrar was a case in which the sale was to a company in which the mortgagee had an interest. The rule is based upon the duty of all persons concerned with the sale to avoid the conflict of interest that will arise if they seek to purchase from the mortgagee. They must not place themselves in a position where their duties and interests conflict, but if there is in fact no such conflict the sale will not be set aside. In the present case, the Halifax discharged the onus of demonstrating that Mr Deakin was not in any way involved in the sale, save as purchaser, as the judge recognised.[30]It having been established before the judge(1) that the sale was at an undervalue and that(2) the sale was to an employee, Mr Deakin, but that(3) Mr Deakin was not involved in the sale and was unaware of that undervalue, the question is whether the sale should be set aside. The judge recognised that on the face of it damages were the proper remedy, but he relied on two matters in particular for rejecting that conclusion. The first is the deception worked by Mr Deakin on his employers. Mr Deakin acquired Yew Tree Farm not merely in breach of the terms of his contract of employment, but having deceived the Halifax. This goes to the propriety of the exercise of the power of sale. The second is that the judge concluded that in consequence of his deception, Mr Deakin could not take advantage of section 104(2).[31]In my judgment, Mr Deakin's deception of his employers does not confer upon the mortgagors, the Corbetts, any right to set the sale aside which they would not have possessed against any other purchaser at an undervalue who did not know of the undervalue and who was not involved in the exercise of the power of sale by the Halifax. No doubt it rendered the sale voidable at the instance of the Halifax, but that is not relevant to the position of the Corbetts.[32]The judge did not accept that the position of a completed sale is really a fortiori the position between contract and completion, which is described by Crossman J and Danckwerts LJ in the passages I have quoted above. The judge said this of Danckwerts LJ's remarks:
'It is, I think, important not to read too much into that statement of the law. If it is read as meaning that the mortgagee's only obligation is one of good faith then it is plainly inconsistent with later authorities. It must, I think, be limited to the circumstances governing the grant of an injunction between contract and completion and not to the rights and remedies available after completion.'
[33]I do not think that this is a sustainable basis upon which to distinguish these cases. It is absolutely correct that the mortgagee's duty is not limited to a duty of good faith, as the decision of the Court of Appeal in Cuckmere Brick v Mutual Finance Ltd [1971] Ch 949 makes clear, but it does not follow that the underlying rationale of the cases is affected. The rationale is that the sale must be tainted by some kind of impropriety, not merely an innocent undervalue.[34]The second ground of distinction suggested by the judge is, I think, unsound. Of course, if the purchaser discovers the impropriety or other defect before completion, then he will take subject to the rights of the mortgagor. But it is not easy to see why the mortgagor's position should be stronger after completion of the sale than it was before. It is right that in Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 Lord Templeman said that 'Where a mortgagee fails to satisfy the court that he took all reasonable steps to obtain the best price reasonably obtainable and that his company bought at the best price, the court will, as a general rule, set aside the sale and restore to the borrower the equity of redemption of which he has been unjustly deprived. But the borrower will be left to his remedy in damages against the mortgagee for the failure of the mortgagee to secure the best price if it will be inequitable as between the borrower and the purchaser for the sale to be set aside.' This statement is made in the context of a case of a sale to a company associated with the mortgagee: and it was held to be inequitable to set the sale aside having regard to the time which had elapsed. This case is analysed by Sir Richard Scott V-C in Medforth v Blake [2000] Ch 86 as exemplifying the nature of the duty placed by equity on the mortgagee to ensure that he deals fairly and equitably with the mortgagor and the others interested in the mortgaged property. Sir Richard Scott said this at page 102 of the report:
'These duties are not inflexible. What a mortgagee or a receiver must do to discharge them depends upon the particular facts of the particular case. A want of good faith or the exercise of powers for an improper motive will always suffice to establish a breach of duty. What else may suffice will depend upon the facts. Tse Kwong Lam v. Wong Chit Sen [1983] 1 WLR 1349 is a very good example. The fact that the mortgagee had an interest in the purchasing company placed the mortgagee under an obligation to show that a proper price had been obtained. This was an obligation more onerous than would otherwise have been required. It is true that Lord Herschell in Kennedy v. De Trafford [1897] AC 180 expressed the duty on the mortgagee in terms much less onerous than the terms in which Salmon L.J. expressed the duty in the Cuckmere Brick case. That does not make the two cases inconsistent with one another. The facts that constituted the mortgagors' complaints were different. And the duty in equity appropriate to have been owed by a mortgagee selling in 1888 is not necessarily of the same weight as the duty appropriate to have been owed by a mortgagee selling in 1967. Equity is at least as flexible as the common law in adjusting the duties owed so as to make them fit the requirements of the time.'
[35]The judge relied on the last section of this passage as justifying an adjustment of the remedies 'to fit the circumstances of the case'. In my judgment, equity will not intervene unless there is some element of impropriety or bad faith on the part of the mortgagee in the exercise of its power of sale. It is not simply a matter of shaping the remedy to fit the circumstances, but of setting aside a conveyance of the legal estate. It is my view that there never was any equity which could be asserted by the Corbetts to set aside the sale to the Deakins.[36]Section 104(2) LPA 1925 is on this view irrelevant. It merely provides that between contract and completion the purchaser is not obliged to investigate the manner of the exercise of the power. The judge considered the question of the protection conferred on the Deakins by section 104(2). He quotes parts of the provision (cf the full version above):
'Where a conveyance is made in exercise of the statutory power the title of the purchaser shall not be impeachable on the ground that the power was improperly or irregularly exercised and any person damnified by an improper or irregular exercise of the power shall have his remedy in damages against the person exercising the power.'
This quotation omits the words releasing the purchaser from any concern to make inquiries before or on conveyance and is inaccurate in other respects. But the judge found that Mr Deakin did not have actual knowledge of the fact that the sale was at an undervalue. It was not suggested before the judge, and he does not find, that Mr Deakin had constructive knowledge of the undervalue, whatever the scope of the phrase 'constructive knowledge' is. Nor did the judge find that Mr Deakin's lack of knowledge of the undervalue was not genuine and honest. This is unsurprising, since Mr Deakin's offer price differed only slightly from the internal Halifax valuations.[37]Nevertheless the judge set the sale to Mr Marples and to the Deakins aside. The judge held that because Mr Deakin was not a purchaser in good faith from the Halifax he could not avail himself of section 104(2). He took the definition of 'purchaser' in section 205(1)(xxi) of the Act, and held that Mr Deakin did not satisfy the definition. Recognising that the dishonesty of Mr Deakin did not relate to any aspect of the exercise of the power of sale other than the identity of the purchaser, he took the view that Mr Deakin's dishonesty vis-à-vis the Halifax was relevant to the question of good faith for the purpose of the statutory definition. He based himself on the well-known passage in the speech of Lord Wilberforce in Midland Bank v Green [1981] AC 513 at page 529:
'My Lords, the character in the law known as the bona fide (good faith) purchaser for value without notice was the creation of equity. In order to affect a purchaser for value of a legal estate with some equity or equitable interest, equity fastened upon his conscience and the composite expression was used to epitomise the circumstances in which equity would or rather would not do so. I think that it would generally be true to say that the words "in good faith" related to the existence of notice. Equity, in other words, required not only absence of notice, but genuine and honest absence of notice. As the law developed, this requirement became crystallised in the doctrine of constructive notice which assumed a statutory form in the Conveyancing Act 1882, section 3. But, and so far I would be willing to accompany the respondents, it would be a mistake to suppose that the requirement of good faith extended only to the matter of notice, or that when notice came to be regulated by statute, the requirement of good faith became obsolete. Equity still retained its interest in and power over the purchaser's conscience. The classic judgment of James L.J. in Pilcher v. Rawlins (1872) LR 7 ChApp 259 , 269 is clear authority that it did: good faith there is stated as a separate test which may have to be passed even though absence of notice is proved. And there are references in cases subsequent to 1882 which confirm the proposition that honesty or bona fides remained something which might be inquired into (see Berwick & Co. v. Price [1905] 1 Ch 632 , 639; Taylor v. London and County Banking Co. [1901] 2 Ch 231 , 256; Oliver v. Hinton [1899] 2 Ch 264 , 273). But did this requirement, or test, pass into the property legislation of 1925?'
[38]There is no doubt that Lord Wilberforce contemplated that the investigation of the question of 'good faith' in its context in the definition of 'purchaser' in section 205(1)(xxi) of the LPA 1925 might involve an investigation of motive. In Midland Bank v Green there was no doubt that the purchaser had knowledge of the interest the defeating of which was the whole purpose of the transaction, and the passage in Lord Wilberforce's speech is intended to point up the difference between the definition of 'purchaser' in the Land Charges Act 1925 (where the crucial words do not appear) and that in the Law of Property Act. There are no cases where such an investigation has been carried out, and the natural meaning of the words certainly suggests that the principal matter affecting 'good faith' is notice, as it was in Pilcher v Rawlins (above) itself. But in any event, it seems to me that it is relevant to ask, good faith vis-à-vis whom? What makes this case unusual is that the lack of good faith has nothing to do with the Corbetts, but has only to do with the Halifax, whose internal rules were dishonestly broken by Mr Deakin. The lack of good faith is thus immaterial to the Corbett's interests, and did not affect those interests. I do not consider that Lord Wilberforce meant that a purchaser for value who has neither actual nor constructive notice of an impropriety connected with the exercise of the power of sale is nonetheless affected by that impropriety merely because of a lack of good faith that has no connection with the impropriety.[39]Accordingly I consider that the learned judge was wrong to set the sale aside on the basis that the Deakins could not take the benefit of section 104(2) of the Law of Property Act 1925.[40]If that is wrong, however, I consider that he was wrong in principle in the manner in which he exercised his discretion to set the sale to the Deakins aside. There is no doubt that there is such a discretion, as the passage I have quoted from Lord Templeman's opinion on behalf of the Board in Tse Kwon Lam 's case (above) demonstrates. In that case, relief other than damages was refused on the grounds of delay.

The judge said this:

'It is true that the Corbetts will gain more from setting aside than they have lost by the under value. But this arises from the increase in house values since 1990. As between the Deakins and the Corbetts, I think it is fair that this increase should accrue to those who bought the house legitimately in 1983 rather than those who bought it dishonestly in 1993. In those circumstances, in my view, the justice of the case requires that the sale be set aside on terms.'
The judge then considered a matter relating to the Corbetts' own behaviour, raised by the Halifax, which he rejected and which was not advanced before this court. He continued 'I do not think that their conduct is really comparable to Mr Deakin's. Mrs Deakin was, I find, fully aware of what here husband was doing at the time. It has also been submitted that I should refuse equitable relief on the ground of delay. The Corbetts' solicitors have not pursued the action with great vigour, but I do not think that the delay has caused the Deakins to suppose that the claim was abandoned. It was not easy for the Corbetts to discover the truth of the transaction until Mr Marples provided them with a statement. In my judgment, notwithstanding the lapse of time, it is equitable as between the Corbetts and the Deakins to set the sale aside.'[41]The Deakins' lender, the Abbey National, preserved its charge, which ranked before that of the Halifax, which was restored. The £20,000 advanced by the Deakins from their own funds was secured by a second charge, as were their capital payments to the Abbey National, and they were ordered to be paid any increase in the value of Yew Tree Farm attributable to works they had carried out, less any further advances received from the Abbey National. Judgment was given against the Corbetts for £204,415. Since the farm was worth some £320,000 at the date of judgment, the effect of the order is to enable the Corbetts to discharge a substantial part of their indebtedness to the Halifax on sale. Inquiries were ordered as to the capital repayments, the increase in value of the property attributable to the Deakins' works and any further advances by the Abbey National, with provision for disclosure, evidence of fact and expert evidence.[42]In my view, the learned judge failed to take account of relevant factors. These are(1) the prejudice caused by the delay between sale and Writ, and the slowness in the prosecution of the claim(2) the fact that Yew Tree Farm was the Deakins' family home for the period of nine years(3) the fact that the Deakins had children who had not attained their majority(4) the disruption that the order for sale would cause them. His concentration on the dishonesty of Mr Deakin obscured the fact that the Halifax, who did have the right to avoid the sale, did not do so and the fact that Mr Deakin had been punished for the lies he told his employer.[43]The delay was in my view far too great. Exchange of contracts with Mr Marples took place on 20 July 1993. The Deakins were registered as proprietors on 12 November 1994, and by 19 January 1994 the Corbetts knew that Yew Tree Farm had been purchased by an employee of the Halifax. Obviously they knew the price. The Halifax had disciplined Mr Deakin by the end of May 1994. The letter before action was sent on 13 October 1994, but the Writ is not issued until 29 May 1996, the statement of claim following on 13 March 1997. Where a market is rising, it seems to me that the claimant has a particular duty to press on with the action, so that the defendant is not prejudiced in the housing market more than necessary. In the result the benefit of the judge's order to the Corbetts was out of proportion to the actual undervalue or to the Deakins' loss.[44]In my judgment, the judge should in any event have declined to set the sale aside but should have left the Corbetts to their remedy in damages.[45]Finally, I should mention that Mr Jefferies for the Deakins addressed a separate argument to the effect that even had the judge been right in his order, he was still wrong to order the Register to be rectified, basing himself on Kingsalton Ltd v Thames Water Developments [2001] EWCA Civ 20 and London Borough of Hounslow v Hare 24 HLR 9 (Knox J). This argument raises difficult questions which do not need to be decided in this appeal, and I should prefer to consider them when it is necessary to do so.[46]I consider that the appeal should be allowed to the extent that I have indicated. There will be judgment for the Corbetts for £20,000 and interest against the Halifax. I would invite submissions in writing as to the remainder of the order.

Lord Justice Scott Baker:

[47]I agree that this appeal should be allowed for the reasons given by Pumfrey J. The Deakins were only able to purchase Yew Tree Farm because Mr Deakin tricked the Halifax into believing that he was somebody else. The reason for Mr Deakin's dishonesty was that the Halifax's in-house rules prohibited a sale to an employee or his family. His dishonesty was neither here nor there as far as the Corbetts were concerned. Their only legitimate concern was that their house should be sold at a fair market value.[48]The Deakins were unaware that the sale was at an undervalue and the dishonesty or lack of good faith on the Deakins' part should, in my judgment, be viewed as quite independent of the fact that the sale was at less than market value. Accordingly I agree that there never was any equity upon which the Corbetts could rely to seek to set aside the sale. Improper or irregular exercise of the power of sale in Section 104 (2) does not include circumstances of which the mortgagee has no knowledge and in which the Corbetts had no legitimate concern. In short, the Halifax's in-house rules and whether they were properly applied was nothing to do with the Corbetts.[49]I also agree that if, contrary to my view, the judge had a discretion to set the sale aside he exercised it wrongly. There were compelling reasons why the sale should stand and the Corbetts be left to their remedy in damages.[50]These included:(1) that Yew Tree Farm was a family home housing minor children;(2) the delay;(3) the work that had been done to the property and;(4) the recent rise in property values.[51]Accordingly, I agree with the order proposed by my Lord. Lord Justice Schiemann[52]I agree with both judgments.

Order

Appeal allowed; costs order to be agreed at a future date. (Order does not form part of the approved judgment)

Cited in 1 later judgment