Wishart v Credit & Mercantile Plc [2015] EWCA Civ 655

[2015] EWCA Civ 655Case No A2/2014/2068
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR KERR QC (sitting as a Deputy High Court Judge)
HC13B00758
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate Monday 6 th July 2015
Before
LORD JUSTICE LONGMORELORD JUSTICE TOMLINSONLORD JUSTICE SALES
Between
Kevin Michael WishartAppellantCredit & Mercantile PlcRespondent
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company165 Fleet Street, London EC4A 2DYTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr P Rainey QC & Mr T Polli (instructed by Glovers Solicitors LLP) for RespondentMr R Tager QC & Mr N Mendoza (instructed by Haynes Orme) for AppellantHearing Hearing date: 15 May 2015
JudgmentLord Justice Sales :Introduction
[1]This is an appeal in relation to a judgment of Mr Tim Kerr QC (sitting as a Deputy Judge of the High Court) – [2014] EWHC 1746 (Ch) – in which he dismissed a claim by the appellant (“Mr Wishart”) to have an overriding interest enforceable against the respondent (“C&M”) based on an entitlement in equity to ownership of a house in Kent called “Dalhanna” and, by reason of such overriding interest, to be entitled to the proceeds of sale of Dalhanna.[2]Dalhanna is on registered land. It was purchased in May 2010 by Kaymuu Limited (“Kaymuu”), a company controlled and wholly owned by Mr Sami Muduroglu (“Sami”). In June 2010, Kaymuu was registered as the legal owner of Dalhanna.[3]Sami was at the time of the purchase a close friend of Mr Wishart. It has now emerged that Sami is a fraudster who acted contrary to Mr Wishart’s interests, which Mr Wishart believed he was acting to promote. On 22 June 2010, Sami caused Kaymuu to borrow £500,000 from C&M in return for a charge given by Kaymuu over Dalhanna by way of mortgage. C&M’s charge was registered. Mr Wishart was in occupation of Dalhanna at this time.[4]Sami took the money borrowed from C&M for himself and then lost it all gambling. He has since disappeared and has been declared bankrupt. Kaymuu defaulted on the loan.[5]C&M exercised its rights under the mortgage, issued proceedings to obtain possession of Dalhanna and then arranged for Dalhanna to be sold in October 2012 for £1.1 million. C&M seeks to retain £694,072.75 from the net proceeds of sale (“the main sum”), to realise its security. Mr Wishart claims this sum as against C&M, contending that his beneficial ownership of Dalhanna was an overriding interest at the time of the registration of C&M’s charge, when he was in occupation of Dalhanna, and so has effect in priority to that charge.[6]The balance of £328,158 (“the surplus”) has been paid into court, to await the outcome of these proceedings. Mr Wishart claims this sum, on the basis of his beneficial ownership of Dalhanna, as part of the proceeds of sale of Dalhanna. C&M claims that it is entitled to recoup its legal costs of these proceedings out of the surplus, as part of the monies covered by its charge on the proper construction of the mortgage deed, as registered.[7]At first instance, Sami’s trustee in bankruptcy also claimed that the surplus should be paid to Kaymuu, and hence should be treated as part of Sami’s estate. However, the judge rejected that claim and the trustee has not sought to appeal. In this court, therefore, the contest in respect of the surplus is simply one between Mr Wishart and C&M. We were told by Mr Rainey QC, for C&M, that even if it is found to be entitled to recoup its legal costs out of the surplus there will still be a residual balance left in court. Mr Rainey accepted that C&M had no claim to this balance and that, even if Mr Wishart failed on all other points in issue before this court, since no other person had an extant claim to the balance Mr Wishart would be entitled to be paid that money.

The judge held:

[8](i) Mr Wishart was the beneficial owner of Dalhanna from the time when Dalhanna was acquired by Kaymuu, by reference to the equity recognised in Pallant v Morgan [1953] 1 Ch 43 ([125]-[165]);(ii) Mr Wishart was in occupation of Dalhanna at the date C&M’s charge was registered, and a reasonably careful inspection of the land at that date would have revealed that he was in occupation ([186]-[195]); however,(iii) Mr Wishart’s interest in Dalhanna did not qualify as an overriding interest as against C&M under section 29 of and paragraph 2 of Schedule 3 to the Land Registration Act 2002 (“the 2002 Act”), because of the operation of a principle akin to an estoppel identified by Lewison J (as he then was) in Thompson v Foy [2009] EWHC 1076 (Ch); [2010] 1 P&CR 16 at [142], by reference to the judgment of Farwell J in Rimmer v Webster [1902] 2 Ch 163, at 173, following Brocklesby v Temperance Permanent BS [1895] AC 173 (“the Brocklesby principle”); therefore C&M’s charge took effect as against Mr Wishart and C&M succeeded in its claim to be paid the main sum ([166]-[185]); and(iv) on proper construction of the mortgage deed, C&M is only entitled to recover its costs of the proceedings against Kaymuu to obtain possession of Dalhanna, and is not entitled to recover the costs incurred in defending the claim brought by Mr Wishart to be paid the main sum and the surplus ([196]-[214]).[9]In this court, the main appeal is by Mr Wishart against the judge’s ruling at (iii) above, regarding application of the Brocklesby principle. C&M seeks to uphold that ruling, but has also issued a respondent’s notice under which it contends that the judge erred in his conclusion at(i) above and in finding that Mr Wishart had any beneficial interest in Dalhanna; on this argument, C&M submits that Kaymuu was at all material times the legal and beneficial owner of Dalhanna. C&M does not contest the judge’s factual findings relevant to his conclusion at(ii) above. However, it appeals in respect of the judge’s construction of the mortgage deed, at (iv) above. C&M submits that it is entitled to recover the entire legal costs of these proceedings, both in relation to the initial steps to recover possession of Dalhanna and in relation to defending its entitlement to receive the main sum and the relevant part of the surplus against Mr Wishart’s claims in these proceedings to be entitled to them.[10]As I explain in detail below, I would dismiss Mr Wishart’s appeal in relation to the judge’s ruling on application of the Brocklesby principle at (iii) above. I would allow C&M’s appeal in relation to the construction of the mortgage deed at (iv) above. Since Mr Wishart’s appeal is to be dismissed, it is unnecessary to reach a definitive conclusion in relation to C&M’s respondent’s notice to contest the judge’s ruling at (i) above. I would wish to reserve my opinion on this point.

The factual background

[11]The judge has set out the detailed and rather convoluted factual background with commendable clarity. It is unnecessary to repeat all the detail in this judgment. The main points to be drawn from his judgment are as follows.[12]Mr Wishart and Sami met in about 1998 and became close friends and business associates. Between 1999 and 2004 they undertook a number of property development projects together. Sami had entrepreneurial flair while Mr Wishart developed good contacts with building contractors and is good at getting things done and bringing developments to fruition. There were never any formal written contractual arrangements between Sami and Mr Wishart. Sami was the wealthier participant and took the lead in their projects.[13]They had a loose understanding that their financial arrangements were, as Mr Wishart put it, “50-50”, but the judge doubted that Mr Wishart received anything like 50% of the profits and found that the arrangements were largely improvised and based on friendship and trust ([6]).[14]In March 2004 Mr Wishart was remanded in custody on serious criminal charges. While in custody, he executed a general power of attorney in favour of Sami, which was revoked on his release from prison. Mr Wishart stood trial and was convicted on certain of the charges and was sentenced in July 2005 to six and a half years in prison. He was only released in June 2007.[15]Meanwhile, in about February 2005, Sami was disqualified from acting as a company director for five years.[16]These events meant that Sami’s brother, Eren Muduroglu (“Eren”), became involved in assisting them to run their business ventures. Eren had a background as a City financial trader.[17]Eren took over as director of various companies in which Sami had an interest. To raise finance for their business ventures, Eren signed personal guarantees and gave security for loans. In return, he expected to participate in any profits. There was a loose informal understanding between him and Sami as to how he would participate in any profits from the development projects which was itself subject to further discussions to be held between Eren, Sami and Mr Wishart at such times as profits appeared to be imminent ([10]-[11]).[18]In 2007, Eren, Sami and Mr Wishart became interested in acquiring for development a cemetery site at Kemnal Manor in Bromley (“the cemetery”). The judge found that the three men had a common intention that although Mr Wishart was not involved in financing the project he would assist in organising the development of the site and would receive a share in the eventual proceeds ([13]-[14]). Again, the arrangement was left as a loose and informal one, with details to be filled in by discussion between them later, when the project bore fruit.[19]The financial arrangements to acquire the cemetery were convoluted. They are described by the judge at [15]-[22]. Mr Stephen Koehne, the responsible solicitor at Stephenson Harwood, acted for Sami and Eren. It was arranged that funding would be provided by Ulster Bank Limited (“Ulster Bank”) and another investor, Ravenblack Developments Limited (“Ravenblack”). A Northern Ireland limited liability partnership called Kemnal Manor Memorial Gardens UK LLP (“KMMG LLP”) was created as the vehicle to acquire the cemetery. KMMG LLP entered into a debenture in favour of Ulster Bank to secure borrowing from Ulster Bank. Eren and Ravenblack were appointed as members of KMMG LLP. The judge found that Eren regarded himself as subject to a loose and vague understanding that he held his interest in KMMG LLP on trust for himself, Sami and Mr Wishart in equal shares ([21]).[20]During 2008 Ravenblack found itself in financial difficulties, and fresh investors were sought to buy out its interest in KMMG PLC. In the hope that new investors would come in and allow Sami, Eren and Mr Wishart to realise some of the value of the cemetery project, from 2009 Mr Wishart was looking for a family home in the Kent area priced at around £1 million to purchase for him and his partner out of the proceeds of selling part of his and the brothers’ interest in the cemetery to the incoming investors.[21]In late 2009, a company called Gresham House plc (“Gresham”) agreed in principle to come in as a new investor in the cemetery project. In view of the likelihood that some profits could now soon be realised as a result of the participation of Gresham in the project, in December 2009 Mr Wishart, Sami and Eren had a meeting to discuss the position. It was agreed that they would each take £1.1 million out of the proceeds of the sale of shares in the project to Gresham and that Mr Wishart would be using his share to buy a family home without obtaining a mortgage, but that all this would be subject to payment of sums due to small investors in other projects and some personal debts of Sami and Eren ([28]-[32], also [156]-[158]). Their agreement was a fluid one to enable the cemetery project and other projects to go forward, rather than a final reckoning; the three men trusted each other to act fairly in taking their shares of the proceeds; they did not give thought to the need to keep funds available for design and construction costs in respect of the cemetery development ([31]-[32]).[22]In December 2009, a new company, Memorial Holdings Limited (“MHL”), controlled by Mr Derek Lucie-Smith of Gresham, was incorporated in Jersey. MHL was to be a vehicle for some of the new investment in the cemetery project. It was agreed that it would acquire an initial 10% holding in KMMG LLP from Eren for £1.13 million. Part of the proceeds of sale seems to have been diverted without authority by Sami, part was used to make payments to creditors and the remainder was divided between Sami (£152,500), Eren (£16,500) and Mr Wishart (£15,000). MHL replaced Ravenblack as a member of KMMG LLP.[23]At this stage, Mr Wishart instructed Mr Paul McPartland, of an architectural consultancy which had been working on the cemetery project, to help him search for a family property to buy. Mr McPartland sent Mr Wishart details of a number of properties, including Dalhanna, which they visited. In January 2010 an offer was made to purchase Dalhanna for £995,000, subject to contract, in the name of “the Kaymuu Property Trust (c/o Mr P McPartland)”. This trust is not to be confused with Kaymuu, the company. It seems that the name was devised by Sami as a reference to Mr Wishart’s initials ([35]-[36]).[24]In early 2010, Gresham continued to make arrangements for its own investment in the cemetery project, additional to that of MHL. As part of the arrangements, money was to be borrowed from Ulster Bank, but it emerged that as a condition of lending Ulster Bank would require a retention of a substantial sum (£3.067 million) in respect of estimated design and construction costs. A new operating company for the cemetery project was incorporated in Jersey, called Memorial Property Investment Limited (“MPIL”). 50% of its shares were held by Eren and the other 50% by MHL. MHL would then become the owner and controller of MPIL, and new investors would acquire shares in MHL as the way of making their investments in the project.[25]By 8 April 2010, the further completion monies from the new investors, totalling £6.65 million, were paid into Stephenson Harwood’s client account. Eren was left with a 45% shareholding in MHL. The effect of the arrangements was that Eren had sold interests which he owned in law and had been paid the £6.65 million in return, which was represented by a chose in action in the form of a debt owed to him by Stephenson Harwood. Eren was the legal owner of the proceeds of sale.[26]Meanwhile, Sami had ceased to be disqualified from acting as a company director. On 31 March 2010 he caused a company called SMU Investments Limited (“SMU”) to be incorporated, with himself as sole shareholder and director.[27]Discussions ensued about what should be done with the proceeds of sale. As part of these, the purchase of Dalhanna was on the agenda, with Mr Koehne acting for the proposed purchaser, Kaymuu Trust. The judge found ([46]) that Mr Koehne’s instructions were to proceed on the basis that Mr Wishart was to be the occupier of Dalhanna.[28]For tax reasons, Sami and Eren agreed that SMU should be put in funds out of the proceeds of sale in order to lend MPIL £3.067 million for MPIL to hold in its account with Ulster Bank in order to satisfy MPIL’s requirement for a retention fund to meet the costs of the cemetery development project.[29]On 9 April 2010, Mr Koenhe, acting on the instructions of Eren, made various payments out of Stephenson Harwood’s client account from the proceeds of sale. Payments were made to various creditors and others. Sami was paid £1.1 million.[30]Also on 9 April, contracts for the purchase of Dalhanna were exchanged. Mr Wishart relied on Sami to arrange the acquisition of Dalhanna for his (Mr Wishart’s) benefit. Mr Wishart did not take any step to secure that the purchase be made in his own name ([162]); he did not see the contract of sale ([52]); “He kept out of the transaction and allowed Sami free rein to undertake the acquisition, trusting him to honour the understanding that Dalhanna would be acquired for Mr Wishart’s benefit, and not Sami’s” ([162]). However, Sami changed the name of the purchaser in the contract from Kaymuu Property Trust to himself, and added a new clause 16 stating that “[t]he Buyer shall be entitled to take the transfer of the property in the name of a limited company” (in due course, Sami made use of this clause to have Dalhanna transferred to Kaymuu on completion). The completion date was to be 26 April 2010. A deposit of £95,500 was paid by Stephenson Harwood to the client account of the solicitors for the vendor.[31]The judge found that Eren felt under an obligation to help raise the funds to complete the purchase for the benefit of Mr Wishart, despite the amount of the proceeds of sale diminishing below what would allow each of the three to have the £1.1 million payout which had been agreed in December 2009, and that he (Eren) agreed to forego his share of the profits from the proceeds of sale for the time being to ensure that enough money was available to complete the purchase of Dalhanna ([54]). Eren, Sami and Mr Koehne discussed whether for this purpose access could be gained to the £3.067 million retention fund, still in Stephenson Harwood’s client account at this stage but earmarked to be loaned by SMU (after being paid by Stephenson Harwood to SMU on the instructions of Eren) to MPIL to satisfy the requirement of Ulster Bank.[32]In the event, there was a series of what the judge described as “chaotic events” which resulted in the balance of the purchase price being paid to the vendor on 11 May 2010 ([59]-[74]). At first, on 26 April the completion monies were paid by Stephenson Harwood to the vendor’s solicitors, but against their undertaking to hold them in their client account until authorised by Stephenson Harwood to release them. That authority was not forthcoming that day, which was the completion date under the contract. However, one of the new investors, Holyoak Investment Inc, was persuaded, against the grant of certain rights by Eren over his shares in MHL, to undertake responsibility for providing £990,000 of the retention fund which SMU had agreed to lend to MPIL. This freed the funds now in the hands of the vendor’s solicitors from being earmarked for that purpose, and Stephenson Harwood was instructed to authorise the release of the funds to the vendor so that completion could take place.[33]The judge accepted Eren’s evidence that he authorised the use of his money (out of the proceeds of sale held in Stephenson Harwood’s client account) to complete the purchase of Dalhanna for Mr Wishart’s benefit, as Mr Wishart’s share of the profits from the cemetery project; and that SMU was merely a conduit used for tax reasons, and was not intended to become the beneficial owner of the money used for the purchase of Dalhanna ([71]-[72]).[34]Sami, who had suffered heavy gambling losses, gave instructions that the purchase should be completed in the name of Kaymuu, which was duly done. There was a short delay before Kaymuu was entered on the register as the legal owner of Dalhanna. Meanwhile, on 14 May 2010 Mr Wishart moved in to Dalhanna.[35]Also on 14 May, C&M instructed Mr Chris Key, a surveyor, to provide a valuation of Dalhanna, because Sami, through Kaymuu, unbeknown to Mr Wishart, had applied to C&M for a loan of £500,000 secured on Dalhanna. Mr Key visited Dalhanna on 19 May. He did not appreciate that Dalhanna was by this time occupied by Mr Wishart and his partner. Sami told Mr Wishart that Mr Key’s visit related to insurance of the property, which was another aspect of the arrangements for the acquisition of Dalhanna which Mr Wishart simply left in Sami’s hands.[36]On 14 June 2010, C&M lent Kaymuu £500,000 in return for execution of the mortgage deed giving C&M security over Dalhanna. Part of the money was used to pay for the stamp duty due on the purchase of Dalhanna, which opened the way to the registration of Kaymuu as legal owner of Dalhanna on 22 June. The same day, C&M’s charge over Dalhanna was registered.[37]By the end of September 2010, Kaymuu had fallen into arrears in respect of its loan from C&M and C&M appointed a receiver. At this stage, Mr Wishart learned that Dalhanna had been mortgaged by Kaymuu. Mr Wishart contacted Sami, who managed to arrange payment of outstanding sums due to C&M, with the result that C&M stood down the receiver. Thereafter, Mr Wishart began to press for formal documentation of relations between him, Eren and Sami.[38]In September 2011 Kaymuu again fell into arrears on the loan and C&M once more appointed a receiver.[39]On 18 November 2011 Sami was made bankrupt, although Mr Wishart only learned of this in January 2012. The beneficial ownership of Kaymuu became vested in Sami’s trustee in bankruptcy (“the trustee”). Other frauds by Sami emerged. Sami did not co-operate with the trustee and eventually warrants were issued for his arrest. In July 2012 he fled abroad. He has not been traced.[40]On 25 May 2012, C&M issued proceedings against Kaymuu in the Tunbridge Wells County Court seeking possession of Dalhanna. At a hearing on 3 July 2012 at which Sami presented the case for Mr Wishart to resist a possession order, the County Court judge made a possession order effective from 10 October 2012.[41]Mr Wishart and his partner voluntarily vacated Dalhanna on 1 October 2012 and delivered the keys to the receiver. On 19 October 2012 Dalhanna was sold for £1.1 million. The main sum was paid to C&M and the surplus was paid into court.[42]Mr Wishart and the trustee were added as parties to the proceedings in the County Court at their request on 6 February 2013 and the action was transferred to the High Court. Mr Wishart filed a Defence and Counterclaim dated 27 June 2013 in which he claimed that he was the beneficial owner of Dalhanna and that he had an overriding interest as against C&M, so that he is entitled to the proceeds of sale of Dalhanna (both the main sum and the surplus). C&M contested these claims and the matter came on for trial before the judge, resulting in the judgment under appeal. Discussion The main appeal: application of the Brocklesby principle

Discussion

[43]The plot on which Dalhanna stands is registered land. When C&M’s legal charge by way of mortgage of Dalhanna was executed on 14 June 2010, Kaymuu had received a deed of transfer from the vendor and was entitled to be registered as the legal owner of Dalhanna (and by virtue of section 24 of the 2002 Act was entitled to exercise the powers of an owner of the property to charge it); and the judge held that Mr Wishart was its beneficial owner in equity. Mr Wishart was in occupation of Dalhanna at that time and his occupation would have been obvious on a reasonably careful inspection of the land on that date.[44]Section 29 of the 2002 Act provides in relevant part as follows:
“(1) If a registrable disposition of a registered estate is made for valuable consideration, completion of the disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority is not protected at the time of registration. (2) For the purposes of subsection (1), the priority of an interest is protected - (a) in any case, if the interest – … (ii) falls within any of the paragraphs of Schedule 3 …”
[45]Paragraph 2 of Schedule 3 to the 2002 Act provides in relevant part as follows:
“An interest belonging at the time of the disposition to a person in actual occupation, so far as relating to land of which he is in actual occupation, except for – … (c) an interest – (i) which belongs to a person whose occupation would not have been obvious on a reasonably careful inspection of the land at the time of the disposition, and (ii) of which the person to whom the disposition is made does not have actual knowledge at that time; …”
[46]For unregistered land, the principal mechanism which regulates whether the purchaser of a legal estate in land is affected by equitable interests in respect of the land is the doctrine of notice: the bona fide purchaser of a legal estate in land without notice of an equitable interest in respect of the land is “Equity’s darling” and will not be bound by that interest. The doctrine of notice protects innocent third parties who acquire the legal title. For registered land, leaving aside the operation of charges entered on the register, the concept of the overriding interest of a person in actual occupation, as defined in legislation (now in the 2002 Act), has been substituted for the doctrine of notice: Williams & Glyn’s Bank Ltd v Boland [1981] AC 487, 503F-504F, per Lord Wilberforce. As Lord Wilberforce explained at p. 504F:
“In the case of registered land, it is the fact of occupation that matters. If there is actual occupation, and the occupier has rights, the purchaser takes subject to them. If not, he does not”
(emphasis added).[47]Despite the importance of actual occupation evident upon reasonably careful inspection as the principal mechanism under the 2002 Act to test whether an innocent third party acquiring legal title should be protected, the words in italics indicate that, in order to establish that an overriding interest exists, the occupier has to show that he has relevant rights capable of binding the purchaser of the legal title in equity, subject only to the question of actual occupation. Therefore, there is scope for the operation of any rule of law which prevents the occupier from having a relevant right as against the purchaser before one comes to apply the actual occupation test, which may have the effect of preventing a finding that there is an overriding interest under the statute.[48]As Browne-Wilkinson LJ put it in Paddington Building Society v Mendelsohn (1985) 50 P&CR 244, at 248, in addressing the operation of the equivalent provision in section 70(1)(g) of the Registered Land Act 1925:
“There is no doubt … that the registered land is subject to the rights of [a person in occupation]. But the essential question remains to be answered, “What are the rights of the person in actual occupation?”
If the rights of the person in actual occupation are not under the general law such as to give any priority over the holder of the registered estate, there is nothing in section 70 which changes such rights into bigger and different rights.”[49]The principle drawn from Brocklesby is such a rule of law which, when it applies, prevents an occupier from having a relevant right against the legal owner. It was helpfully analysed by Lewison J (as he then was) in Thompson v Foy [2009] EWHC 1076 (Ch); [2010] 1 P&CR 16 at [139]-[143]. In that case, the claimant in actual occupation of the relevant property (Mrs Thompson) maintained that, among other things, she had an equity to set aside a transfer of the legal title to her daughter (Mrs Foy) on the grounds of undue influence. Lewison J found that no such equity existed, but nonetheless considered what would have been the position if it did. Mrs Foy, the legal owner, mortgaged the property to a lender (TMB). Lewison J’s view was that, by reason of application of the Brocklesby principle, the claimant’s equity would not have qualified as an overriding interest with priority over the lender’s charge.[50]In the passage at [139]-[143], Lewison J first referred to Paddington Building Society v Mendelsohn, in which A provided the cash to buy a flat which was taken in the name of B, who took out a mortgage for the remainder of the price with A’s agreement. A knew and intended that the mortgage was to be granted, and that without the mortgage the flat in which she claimed an interest could not have been acquired. When the mortagagee sought possession, A contended that she had an overriding interest based on her actual occupation which bound the mortgagee. This claim failed; A’s equitable interest in the flat was taken to be subject to the mortgagee’s rights.[51]Lewison J continued thus at [141]-[143]: “141. Mr Din [counsel for Mrs Thompson] submitted that, on the facts of that case, all that the Court of Appeal was concerned with was determining the nature of A's beneficial interest in the property and that in the present case I am concerned with the vindication of a pre-existing right that does not depend on the intention of the parties. That seems to me to be a very narrow reading of Paddington Building Society v Mendelsohn. Moreover a wider principle is suggested by the following observations of Lord Oliver of Aylmerton in Abbey National Building Society v Cann [1991] 1 AC 56. The Court of Appeal had held that Mrs Cann had left it to her son to raise money on mortgage to complete the purchase of the property. Lord Oliver held that that finding of fact was correct. He continued (p. 94): "If that is right, it follows that George Cann was permitted by her to raise money on the security of the property without any limitation on his authority being communicated to the society. She is not, therefore, in a position to complain, as against the lender, that too much was raised and even if, contrary to the view which I have formed, she had been able to establish an interest in the property which would otherwise prevail against the society, the circumstances to which I have alluded would preclude her from relying upon it as prevailing over the society's interest for the reasons given in the judgment of Dillon L.J. in the Court of Appeal."142. This, as it seems to me is a much broader principle, akin to an estoppel. In the course of his reasoning in the Court of Appeal (which Lord Oliver approved) Dillon LJ applied the principle in Brocklesby v Temperance Permanent BS [1895] AC 173 which was referred to and applied by Farwell J in Rimmer v Webster [1902] 2 Ch 163, a case on which Mr Wood relied. Shortly stated [at p. 173] the principle is that when: "the owner is found to have given the vendor or borrower the means of representing himself as the beneficial owner, the case forms one of actual authority apparently equivalent to absolute ownership, and involving the right to deal with the property as owner, and any limitations on this generality must be proved to have been brought to the knowledge of the purchaser or mortgagee."143. One thing is clear from start to finish in this case. Money was always going to be raised on mortgage. Mrs Thompson knew and understood that and wanted it to happen. She wanted it to happen because she knew that without a mortgage she would not receive her £200,000. She executed the assent transferring the legal title to Mrs Foy in order to enable the money to be raised by the grant of a mortgage. In those circumstances I would have held that Mrs Thompson was precluded from relying as against TMB upon any right to set aside the assent for undue influence.” "If that is right, it follows that George Cann was permitted by her to raise money on the security of the property without any limitation on his authority being communicated to the society. She is not, therefore, in a position to complain, as against the lender, that too much was raised and even if, contrary to the view which I have formed, she had been able to establish an interest in the property which would otherwise prevail against the society, the circumstances to which I have alluded would preclude her from relying upon it as prevailing over the society's interest for the reasons given in the judgment of Dillon L.J. in the Court of Appeal." "the owner is found to have given the vendor or borrower the means of representing himself as the beneficial owner, the case forms one of actual authority apparently equivalent to absolute ownership, and involving the right to deal with the property as owner, and any limitations on this generality must be proved to have been brought to the knowledge of the purchaser or mortgagee."[52]The Brocklesby principle is not based on actual authority given to the agent, but rather on a combination of factors: actual authority given by the owner of an asset to a person authorised to deal with it in some way on his behalf; where the owner has furnished the agent with the means of holding himself out to a purchaser or lender as the owner of the asset or as having the full authority of the owner to deal with it; together with an omission by the owner to bring to the attention of a person dealing with the agent any limitation that exists as to the extent of the actual authority of the agent. This combination of factors creates a situation in which it is fair, as between the owner of the asset and the innocent purchaser or lender, that the owner should bear the risk of fraud on the part of the agent whom he has set in motion and provided (albeit unwittingly) with the means of perpetrating the fraud. The same principle applies where the dishonest vendor or mortgagor of the asset, who by the sale or mortgage raises money from an innocent third party, has been vested with the legal title as a trustee: Rimmer v Webster at p. 173. As Farwell J explained there:
“The gist of the case is that the real owner has invested the dishonest vendor or mortgagor with all the indicia of title as absolute owner for the purpose of enabling him to deal with the property, although in a limited way only; whether the trust was to sell only, or to mortgage only, is immaterial, if the mortgagee or purchaser had no notice of the existence of any trust at all.”
[53]In that case, the owner of a mortgage bond delivered it to an agent with instructions to sell it, and transferred legal title to the agent. In breach of his authority, the agent mortgaged the bond to a mortgagee who had no notice of the limits on the agent’s authority and so believed he was dealing with someone with full legal power to enter into the mortgage transaction. The agent pocketed the proceeds of the mortgage. Farwell J held that, by operation of the Brocklesby principle¸ the mortgagee was entitled to maintain his security interest in relation to the bond as against the owner.[54]In Abbey National Building Society v Cann a mortgagee brought possession proceedings in respect of a house which had been purchased in the name of Mrs Cann’s son George using money raised from the building society against a legal charge over the house. Mrs Cann claimed to have an equitable interest in relation to the house and claimed to be entitled to have this treated as an overriding interest under section 70(1)(g) of the Land Registration Act 1925 on grounds of her actual occupation of the house at the relevant time. Mrs Cann left George in charge of the arrangements for the purchase of the house. She had given George authority to raise money by way of mortgage if necessary, but he exceeded the limits of his authority and borrowed much more than she had authorised. This court held that even if Mrs Cann had been in occupation of the house at the relevant time, her interest did not override the security rights of the building society, which could be enforced to the full extent of the borrowing by George to which the mortgage related: (1989) 57 P & CR 381. The basis for this ruling was the application of the Brocklesby principle: see pp. 392, 394 and 395 per Dillon LJ, Ralph Gibson LJ and Woolf LJ respectively. In the House of Lords, Mrs Cann’s appeal was dismissed on the grounds that she could not show that she was in actual occupation of the house at the relevant time. However, in the leading speech, Lord Oliver (with whom the other members of the Appellate Committee agreed) also approved, obiter, the reasoning of the Court of Appeal: [1991] 1 AC 56, 94B-G.[55]In my view, this leaves this court in the position that it is formally bound by the reasoning in Cann in the Court of Appeal, which formed the ratio decidendi at this level and was not disapproved when the case went to the House of Lords; but in any event, it is reasoning expressly endorsed by the House of Lords and should be followed in an equivalent case. The Brocklesby principle has been recognised in a number of cases since Cann: Skipton Building Society v Clayton (1993) 66 P & CR 16, CA (see p. 228, per Sir Christopher Slade); Thompson v Foy; and Bank of Scotland v Hussain [2010] EWHC 2812 (Ch).[56]Mr Tager QC, for Mr Wishart, did not dispute the existence of the Brocklesby principle, but submitted that it does not assist C&M in the present case. I disagree. In my judgment, the facts of the present case are analogous to those in Cann and the judge was right to hold that any beneficial interest which Mr Wishart enjoyed in relation to Dalhanna had to be treated as subordinate to C&M’s mortgage.[57]In our case, as the judge found, Mr Wishart left the acquisition of Dalhanna completely in the hands of Sami. Mr Wishart gave Sami authority to make whatever arrangement he saw fit to acquire Dalhanna, so long as the net result was that Mr Wishart would have the beneficial ownership of it free of any mortgage. As the judge said, Mr Wishart gave Sami “free rein” to make the arrangements for the acquisition ([162]). Clearly, Sami acted outside the limits of his authority by arranging for the grant of the mortgage over Dalhanna to C&M, but C&M was not on notice of any such restriction on his authority. Mr Wishart exercised no supervisory function whatever in relation to what Sami might do to effect the transaction to acquire Dalhanna. He did not ask to inspect or countersign the contract of purchase. He did not contact the vendor to explain his interest in the acquisition; nor did he seek to enter any note of his interest on the register at the time of the acquisition. He did not arrange for Eren to explain to anyone that the money which was being provided for Sami to complete the purchase of Dalhanna was to be regarded as Mr Wishart’s money. In this way, in practical terms, Mr Wishart furnished Sami with the means to hold himself out as the true beneficial purchaser of Dalhanna, and hence as the legal and beneficial owner of the property for the purposes of borrowing money from C&M against the mortgage in its favour.[58]In my view, on the facts of this case the judge was fully entitled to find that “Mr Wishart’s abstinence from any involvement at all in the mechanics of the purchase meant that he had given Sami the means of representing himself (it does not matter whether directly, or through a corporate nominee) as the beneficial owner of Dalhanna, with full authority to deal with third parties as owner” ([181]). I consider that on the facts as found by the judge, he was right to hold that Mr Wishart was precluded by operation of the Brocklesby principle from maintaining that he had a beneficial interest in relation to Dalhanna with potential to have priority over the security interest of C&M, and hence was right to hold that Mr Wishart could not claim to have an overriding interest as against C&M.[59]I would therefore dismiss Mr Wishart’s appeal.

The respondent’s notice

[60]This ruling on the main appeal makes it unnecessary to examine the issue raised by C&M by way of respondent’s notice, namely whether the judge was right to find that Mr Wishart had any beneficial interest at all in Dalhanna. Mr Rainey submitted that the judge was wrong to hold that Mr Wishart acquired a beneficial interest in Dalhanna on the basis of a Pallant v Morgan equity.[61]I prefer to reserve my opinion on this issue. The precise jurisprudential basis of the type of equity recognised in Pallant v Morgan is a matter of some controversy: see the discussion in Crossco No. 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619; [2012] 1 P & CR 16. We heard only cursory submissions about it. I do not think it is appropriate to go into the point in detail in this judgment.[62]However, I think it is right to say that I am by no means convinced that the judge was wrong on the issue of Mr Wishart’s beneficial interest in Dalhanna, at least as to the result. At the very least, Mr Wishart has a strong argument that he did acquire a beneficial interest in Dalhanna in circumstances where Sami, Eren and Mr Wishart were all agreed that Mr Wishart should have some form of proprietary interest in the cemetery project from the outset; their agreement crystallised and was made reasonably precise in December 2009 as to their joint intention that his share in the partial realisation of the cemetery project at that stage should be about £1 million to acquire a house, mortgage-free; and the arrangement crystallised further later on, to the extent that the legal owner of the shares being sold to effect that realisation and of the monies which were the proceeds of sale of those shares (i.e. Eren) recognised that Mr Wishart was entitled to have the benefit of some £1 million thereof to acquire Dalhanna and gave instructions for payment to acquire Dalhanna for that purpose.

C&M’s cross-appeal: the interpretation of the mortgage deed

[63]I turn, then, to C&M’s appeal in relation to the judge’s decision regarding the extent of C&M’s security interest under the mortgage deed in respect of Dalhanna and its proceeds of sale. This issue turns purely on the true construction of the terms of the charge set out in the mortgage deed.[64]By clause 2.2, Kaymuu, as mortgagor, charged Dalhanna by way of legal mortgage as a continuing security for all present and future indebtedness of Kaymuu to C&M covered by clause 3.1, “all other liabilities of [Kaymuu] to [C&M] present future actual or contingent” and “all costs and mortgagee’s expenses arising hereunder as hereinafter provided”, together with interest.[65]Clause 3 set out the mortgagor’s covenants. By clause 3.1, Kaymuu covenanted, among other things, “to pay to the Lender all money and discharge all obligations and liabilities which now are or at any time hereafter may be due and owing … and all legal and other costs charges and expenses on a full indemnity basis”.[66]Clause 3.13 included the following covenants by Kaymuu:
“3.13.1 … to pay on a full indemnity basis to the Lender … the amount of all expenses properly incurred by the Lender … in relation to this Legal Charge with interest thereon … and until repayment such sums and interest shall be charged upon the Property 3.13.2 For the avoidance of doubt IT IS HEREBY AGREED that the expression ‘expenses’ includes all costs moneys charges and expenses properly paid and all liabilities properly incurred by the Lender … (including legal costs charges and expenses ascertained as between solicitor and own client) on or in connection with or incidental to the Property and this Legal Charge and all expenses herein covenanted by the Mortgagor to be paid and in particular in connection with 3.13.2.1 inspecting surveying or obtaining any report of any nature or of any kind whatsoever in connection with the Property or repairing rebuilding or reinstating any part thereof or any works thereon where the Lender … reasonably considers such to be necessary for the benefit or preservation of the Lender’s security or to enhance its realisation 3.13.2.2 investigating any matter in relation to the Property and/or considering enforcing or attempting to enforce the rights and powers of the Lender … hereunder or under the general law 3.13.2.3 doing or considering any other matter or thing whatsoever which the Lender … reasonably considers to be for the benefit of or preservation of or the more advantageous realisation of the Lender’s security.”
[67]The dispute between the parties concerns the extent to which C&M is entitled to treat its charge over Dalhanna as covering its legal and other expenses in resisting the claims by Mr Wishart and by the trustee in the possession proceedings originally launched by C&M, maintaining (in Mr Wishart’s case) that he was beneficially entitled to Dalhanna and the proceeds of its sale and enjoyed an overriding interest as against C&M in respect thereof and (in the trustee’s case) that he was entitled to the surplus for the benefit of Sami’s creditors. The question is whether C&M is entitled to recoup these expenses from the surplus presently held in court. The judge held that the mortgage deed did not cover these expenses, but only covered C&M’s initial costs of the possession proceedings against Kaymuu, which had already in fact been included in the main sum: [214].[68]In my view, the judge has erred in his interpretation of the mortgage deed. I agree with Mr Rainey that on a straightforward and natural construction of the words used in clause 3.13.2.2, the costs and expenses of C&M’s defence against Mr Wishart’s claims were incurred in connection with “enforcing or attempting to enforce the rights and powers of the Lender” under the mortgage deed.[69]Further, had it been necessary for C&M to rely instead on clause 3.13.2.3, I agree with Mr Rainey that this provision on its proper construction also covers C&M’s expenses in defending itself against Mr Wishart’s claims. In defending itself against those claims, C&M was seeking to protect the value of its security in relation to Dalhanna, since the whole point of Mr Wishart’s claim was to secure the payment to himself of its proceeds of sale, leaving C&M with nothing. In my opinion, C&M’s defence against Mr Wishart’s claims was directed to “the benefit of”, and “the … preservation of” and “the more advantageous realisation of” C&M’s security under the mortgage deed.[70]Contrary to the view of the judge, there is nothing in Parker-Tweedale v Dunbar Bank Plc (No. 2) [1991] Ch 26 which indicates that these provisions should not simply be read and given effect according to their natural meaning.[71]Similarly, in maintaining its case for a more, rather than less, extensive interpretation of clause 3 (in particular, clause 3.13), including on this cross appeal, so as to maximise the extent to which it is entitled to have recourse to the surplus, against any submissions to the contrary by Mr Wishart and the trustee, C&M has likewise acted to enforce or attempt to enforce its rights under the mortgage deed and to maximise the effective realisation of and recovery by virtue of its security under that deed, and hence within the meaning of clause 3.13.2.2 and of each of those phrases used in clause 3.13.2.3.

Conclusion

[72]For the reasons given above, I would dismiss Mr Wishart’s appeal and allow C&M’s cross-appeal. The effect of this is that, out of the proceeds of sale of Dalhanna, C&M is entitled to keep the main sum and is entitled to recoup out of the surplus the costs of defending itself against the claims of Mr Wishart and the trustee made in the course of these proceedings.

Lord Justice Tomlinson:

[73]I agree.

Lord Justice Longmore:

[74]I also agree.

Cited in 7 later judgments