A rather odd case dealing with competing charges on a right to buy property turned up at the High Court. Brighton & Hove City Council v Audus [2009] EWHC 340 (Ch) was an attempt by Brighton to challenge the validity of a second charge on the property held by the titleholder’s nephew, Mr Audus. Brighton were trying to ensure that there was some, or rather considerable, equity in the property against which their charge under Section 22 of the Health and Social Services and Social Security Adjudications Act 1983 (for care home costs) could take effect.

The facts were briefly as follows. Mr & Mrs Bull were joint secure tenants of Brighton. In 1989, they exercised the right to buy for £12,375, at a 70% discount. Mr Bull died in 1991, leaving Mrs Bull as sole proprietor. In 1988, at the time of the purchase, there were two charges record on the register, both in favour of Mr Audus. The first charge was for £12,375 – the purchase price, which had been ‘loaned’ by Mr Audus to the Balls. No interest was to be accrued. The second charge stated that ‘upon the advance of [£12,375] it was agreed between the parties hereto that the borrowers should secure to the lender the benefit of any capital appreciation of the property’. No redemption date was set and provision made for redemption by the Bulls’ estate. There was some confusion in both deeds as to who was the title holder and who the beneficiary, but the Bull’s held the title at the Land Registry. In evidence, Mr Audus and the conveyancing solicitor both gave evidence that the arrangement was that Mr Audus would pay all the legal costs, service charges and works charges, while the Bulls were to live at the property rent free for the rest of their lives, leaving the property to Mr Audus. In 2007, Mrs Bull moved to a residential care home.

In 2008, Brighton registered its charge. Brighton then sought to contest the second charge. Rather surprisingly, and to the Court’s disquiet, Mrs Bull was not a party to the proceedings, although the potential outcome would affect her directly. Nonetheless, no challenge to Brighton’s locus standi was made by Mr Audus.

Brighton’s claim was made on a number of grounds:

The first charge was accepted as a legal charge, being a mortgage or security transaction. The second charge was part of the same transaction. it was therefore void as a clog on Mrs Bull’s equity of redemption under the first charge, being ‘repugnant to Mrs Bull’s contractual and equitable rights’ to redeem the first charge. Further the second charge was collateral to the the first charge and unfair and unconscionable.

Mr Audus’ filed defence said that Mrs Bull would be estopped from denying the validity of the second charge and therefore so would the Council, and further, that the express common intention of Mr & Mrs Bull and Mr Audus was that Mr Audus should receive the whole of the interest, such that Mrs Bull holds the lease on constructive trust for Mr Audus absolutely, or Mr Audus is entitled to the lease absolutely via proprietary estoppel.

Brighton’s response was that Mrs Bull was not estopped in any relevant way, or that any estoppel was not binding on the Council. Further, alternative cases of constructive trust and proprietary estoppel could not be put, because Mr Audus relied on the charges of 1988 giving effect to his arrangement with the Bulls, (meaning, I presume, that the charges were the agreement and there could be no trust or estoppel above them). In addition, the Land Registration Act 2002 meant that the registration of its charge overrode mere equitable interests or claims.

So, just about everything was thrown in on both sides (except Brighton’s locus standi, of which more later).

The Court, Mr Justice Morgan, found that a condition which is a clog on the contractural and equitable right to redeem is void, not just voidable. As void it is open to third party challenge by a subsequent encumbrancer, rather than, if it was just voidable, only open to challenge by the mortgagor –Merhban Khan v Makhna (1930) 57 Ind. App. 168.

However, the arrangement of 1988/9 did not involve a loan or creation of a security interest, as there was no intention by either party that Mr Audus should be repaid by the Bulls. Mr Audus was to be the owner, although his rights were subordinate to the agreement – title in the name of the Bulls, the Bulls to remain in occupation for the remainder of their lives and, if Mr Audus should die, the flat was left to the Bulls. The charges were the conveyancing solicitor’s idea, perhaps to try to avoid the recovery of discount by disposal within 5 years under s.155(2) HA 1985 (as it was at the time), but actually, according to Morgan J, the arrangement would not have been a relevant disposal anyway.

The charge deeds do not contain some relevant matters and contain many irrelevant terms for the agreement made. The passages on redemption may have provided for the ‘loan’ and the remaining sum to be redeemed, should, say, the Bulls have won the lottery, but the Court did not consider that this was ever within the consideration of the Bulls or Mr Audus.

As this was not a mortgage or security charge, the contractual and equitable right to redeem, Kreglinger v New Patagonia Meat and Cold Storage Company Limited [1914] AC 25, did not arise; Welsh Development Agency v Export Finance Co Limited [1992] BCC 270, Lavin v Johnson [2002] EWCA Civ 1138 and Dutton v Davis [2006] EWCA Civ 694 followed. Warnborough Limited v Garmite Limited [2003] EWCA Civ 1544 is authority for the proposition that where there is a composite transaction, which includes a genuine mortgage, it is open to the court to assess the overall character of the transaction and identify that character as being other than a mortgage. That precedent applied here.

Brighton’s argument that in assessing a composite transaction where one provision is attacked as repugnant to the right to redeem, the composite should be considered without that provision, was wrong as it prejudged the nature of the composite agreement.

There was room for argument about the written rather than oral terms of the agreement in this case, but Brighton had accepted the binding nature of Mr Audus’ oral agreement. No point on section 2 Law of Property (Miscellaneous Provisions) Act 1989 was taken.

So the equitable doctrine of no clog on redemption did not apply. There was therefore no reason to disregard Mr Audus’ rights under the second charge, which had priority to the Council’s charge – as the Council did not have the right to charge ‘the land’, just Mrs Bull’s interest.

Further, even if there was an equitable claim, it was Mrs Bull’s alone as this was not a mortgage or security and the statutory charge did not enable the Council to bring its own claim. Brighton had no locus standi unless the second charge was a clog on the equity of redemption of the first charge and the first charge was a mortgage or security.

That settled the case, but on the remaining arguments – and assuming that the charge had been found to be a clog on the equity of redemption – the transaction was not unconscionable, unlike a comparable commercial transaction.

However, there was no estoppel by representation or promise in what Mrs Bull had said or done, and likewise there was no common intention constructive trust, as the agreement contained terms that do not accord with such a trust.

But there was, unnecessarily on the primary finding, a proprietary estoppel. Mr Audus believed he had an entitlement in due course to the full value of the flat, subject to the Bull’s living there for the remainder of their lives. The Bulls knew he had that belief. Mr Audus acted to his detriment in paying the service charges, ground rent etc.. On that basis, should Mrs Bull wish to assert that the ‘supplemental deed’ – the second charge – was void, she would be estopped from doing so – this is not incompatible with Cobbe v Yeoman’s Row Management Ltd [2008] 1 WLR 1752, which Brighton had relied on. The Court decided not to comment on any potential issues that might have arisen under the Land Registration Act 2002 on Brighton’s charge in this regard.

Well – that was something of a mess, all in all, although the primary finding – that the charge was not that of a mortgage or security – seems right on the very scanty factual evidence. And why did Mr Audus accept Brighton’s locus standi to bring the claim, given that that it rested entirely on the disputed nature of the charge? (Unless I’m missing something here…)

While there were clear practical reasons why Mrs Bull had not been joined – given her health – it is extraordinary that neither party sought to have her joined and represented. And there are so many open ends – the Law of Property (Miscellaneous Provisions) Act 1989 issues just for starters. Morgan J gave a lengthy judgment, but one senses the dancing on the edge of the abyss – even if the result seems broadly right.