Web Journal of Current Legal Issues, refereed Case Note first published 23 February 2001.

Radley-Gardner, 'Chargees and Family Property.' [2001] 1 Web JCLI
<http://webjcli.ncl.ac.uk/2001/issue1/gardner1.html>

Chargees and Family Property
Oliver Radley-Gardner, 
College Lecturer, Pembroke and Somerville Colleges, Oxford. 

<oliver.radley-gardner@law.ox.ac.uk>

I am grateful to Mr Charles Harpum and the anonymous referee for their helpful comments on this note.

© Copyright 2001 Oliver Radley-Gardner
First published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Summary
The decision in The Mortgage Corporation v Silkin, The Mortgage Corporation v Shaire [2000] 1 FLR 973, contains a thorough examination of the changes brought about by the Trusts of Land and Appointment of Trustees Act 1996. It shows a shift in the balance between secured creditors and homeowners. After initial doubts about the substantive effect of the Act, the case appears to support the view that the courts have been equipped with a useful and more flexible tool to tailor outcomes to suit the particular facts of the case. In so doing, the case suggests a workable practical solution to the problems arising from the often simultaneous functions of family property as both a home and as an asset in commercial transactions.

Contents
Introduction
The Nature of the Problem
Shaire: The Facts
Shaire: The Decision
The Old Law
The effect of the Trusts of Land and Appointment of Trustees Act 1996
The Balancing of the Various Interests
The Order
Evaluation
Bibliography

Introduction
“The conceptual framework supplied by the law of real property, and especially that of co-ownership interests in land under the 1925 Law of Property Act, was not drafted to deal with the problems of a modern-day owner–occupying population…Instead, it has been largely left to the judges to refashion a conceptual framework devised in the early twentieth century to deal with problems created by the demographics of the late twentieth century (Dewar, 330).”

As the author of this passage goes on to observe, the Trusts of Land and Appointment of Trustees Act 1996 is the one notable instance where Parliament has intervened. The effect of the Act was considered in the recent decision of Shaire,  in the context of applications to order sale of the family home by a mortgagee who has acquired only one of the co-owner’s beneficial interests. The case decided that sections 14 and 15 of the 1996 Act give the court greater flexibility than they previously had under  the Law of Property Act 1925, s 30 when asked to exercise their discretion on such an application. Although concerns have been raised concerning this approach (Pascoe, 315, 327-328) this note seeks to show that Neuberger J’s application of the statute is not only in line with expectations, but also to be (cautiously) welcomed.

The Nature of the Problem

Domestic property is both a home and an asset. As a home, frequently financed by a mortgage, its function is to provide a stable and reasonably permanent base for the family. As an asset, the house represents much of the co-owner’s capital, is used as security for loans and is targeted by creditors as the most permanent and easily identifiable asset of the debtor. This duality of family property lies at the heart of many of the problems with which courts are faced in this context. Disputes between those interested in occupying the home and those interested in its cash value alone generally fall into three categories:

Disputes between the co-owners themselves, usually where one of the co-owners wishes to sell up and move on while the other party wishes to remain in the home (with a special regime on divorce: see Smith pp301-302 for an outline).

Applications by creditors who have acquired a beneficial interest from one of the co-owners. This might arise where a creditor enforces a charging order against the judgment debtor’s beneficial interest, or where one co-owner has fraudulently executed a mortgage of the jointly owned property of which the other co-owner is unaware.

When a trustee in bankruptcy is appointed and, in pursuance of his statutory duty (Insolvency Act 1986, s 305(2)) seeks to sell the bankrupt’s share in the home in order to satisfy his creditors as soon as possible.

The Shaire case examines the relationships between these types of disputes under the new regime.

Shaire: The Facts

The case turns on the depressingly common occurrence of a fraudulent mortgage of the home by one co-owner. Mr and Mrs Shaire, who were beneficial joint tenants of the matrimonial home subject to a mortgage in favour of Abbey National, were divorced in 1987. As part of the divorce settlement, Mr Shaire agreed to sell his share in the property to Mrs Shaire and one Mr Fox, with whom she had started a relationship in 1986 and who had subsequently moved in with her. On the evidence, it was held that they were intended to be joint owners of Mr Shaire’s interest. In total, Mrs Shaire had a 75% interest in the house. In order to buy her ex-husband out, Mrs Shaire and Mr Fox took out a second mortgage with Chase Manhattan. This second mortgage, over half the house, was considerably higher than the first, reflecting the increase in the house’s value. The mortgage was applied roughly equally to three purposes: to buy out Mr Shaire, to redeem the Abbey National mortgage and to provide funds. Mr Fox died in 1992. It was subsequently discovered that he had fraudulently taken out two more mortgages, forging Mrs Shaire’s signature on the relevant documents. Mrs Shaire had no knowledge of their existence. The first mortgage was in 1988 with First National Bank, the money from which Mr Fox used personally. In 1990, a second mortgage was taken out with the claimant, TMC, with which the Chase and FNB mortgagees were redeemed. Mr Fox spent the surplus.

Mrs Shaire denied any direct liability under the TMC mortgage, which was held by the court to bind only Mr Fox’s 25% share. She did agree, however, that she was indirectly liable to TMC, in that the TMC mortgage had been used to pay off the Chase mortgage. TMC was subrogated to the Chase mortgage to the extent of Mrs Shaire’s beneficial interest, that is, 75%. TMC brought separate actions against its own (Silkin) and Mrs Shaire’s solicitors, however these were not in dispute in the present case.

Shaire: The Decision

Neuberger J was faced with the following question: Should the property be sold to satisfy the innocent mortgagee, retained in order to provide a home for Mrs Shaire, or could some intermediate ground be found? To answer this question, he had to decide whether the 1996 Act had changed the law relating to disputes between creditors and homeowners. 

The Old Law
As a starting point, it may be useful to briefly consider the way in which the caselaw under the Law of Property Act 1925, s 30 developed. The section provided that ‘any person interested’ under a trust for sale ‘may apply…for an order directing the trustees for sale to give effect thereto, and the court may make such an order as the court thinks fit’. This statutory regime originally applied equally to applications by co-owners, secured creditors or trustees in bankruptcy. With regard to disputes between co-owners, the courts had developed a settled approach, which allowed them to mitigate substantially the hardships that could arise from an application of the strict logic of the trust for sale. This approach entailed finding a “collateral” or “secondary purpose”, which allowed them to rebut the statutory presumption in favour of sale. 

The approach with regard to third party secured creditors who had become interested in the home was much more uneven. Three separate approaches are discernible in the caselaw (see TSB Bank Plc v Marshall, Marshall and Rodgers [1998] 2 FLR 769 (County Court)).

1. Sale ordered except in exceptional circumstances.
This is the terminology which seems to have been accepted by most commentators. This test was applied where either a secured creditor or the trustee in bankruptcy of a beneficiary sought sale (see Megarry and Wade 2000, para 9-069, and the observations of Neuberger in Shaire at 986-987). Under this approach, the collateral purpose doctrine applied as between the co-owners while they were still joint owners and joint occupiers. However as soon as joint ownership was interrupted by alienation of a share in the beneficial interest by one of the parties, the collateral purpose became irrelevant. The party resisting sale had to point to an exceptional circumstance instead. The courts took an extremely restrictive view of what amounted to an exceptional circumstance, so that such discretion as there was, was exercised within a very narrow compass (for a recent account of the cases, see Miller 1999). The reason for treating these claimants in the same way apparently rested on the assumption that the commercial hardship suffered by secured creditors and unsecured creditors claiming through the trustee in bankruptcy could be equated. The inability to liquidate their securities could have potentially the same deleterious consequences for mortgage lenders (and their shareholders) as for other creditors.

2. Subsisting collateral or secondary purpose. 
A second approach, expressed most clearly in Peter Gibson LJ’s judgment in Abbey National v Moss [1994] 2 FCR 587 at 597-598, sought to put a secured creditor in the same position as the co-owner from whom he had derived his beneficial interest. This approach was, of course, more favourable to the occupant who was resisting sale, who had only to demonstrate a subsisting collateral purpose which did not in any way have to be exceptional. Essentially, this approach seems to rest entirely upon the nemo dat quod non habet principle (ibid. 597: ‘The assignee cannot normally be in a better position than the assignor’). If the original co-owner was bound by a collateral purpose, then, so long as the act of alienation did not end that purpose, the third party to whom the beneficial interest was transferred was equally bound. This second approach gave rather greater protection to occupiers than the first. However, whatever its merits, it is doubtful that this application of the collateral purpose doctrine to all cases reflected the law as it stood. 

3. Discretion to do justice in the case in hand. 
Finally, there were some judicial pronouncements which, explicitly or by implication, supported a discretionary approach when dealing with applications under section 30. According to this approach the court could “look into all the circumstances of the case and consider whether or not…it is right and proper that such an order shall be made”. Despite isolated pronouncements in favour of such a discretion, this approach was never seriously adopted by the courts. The Court of Appeal explicitly rejected it in Bankers Trust Co v Namdar [1997] EGCS 20, acknowledging that the weight of authority was against it.

The courts’ lack of discretion extended to the form of the final order made. It could either order or refuse sale. Any orders beyond this were only permissible to the extent that they were ancillary to an order for sale (Law Com No 181, at para 12.4; Dennis v McDonald [1982] Fam. 63 at 73). Thus even if the courts had been granted a wide discretion, they would have lacked the remedial powers to make full use of it.

The effect of the Trusts of Land and Appointment of Trustees Act 1996
Had the old law applied in the Shaire case, it is clear that Mrs Shaire would almost certainly have failed in her claim as there were no exceptional circumstances evident. There was some authority that the old law should still apply. This was based on the functional similarity of  the Law of Property Act 1925, s 30 and section  14 of  the 1996 Act,  (TSB Bank Plc v Marshall, Marshall and Rodgers [1998] 2 FLR 769). This view was rejected by Neuberger J. He gave a number of reasons for so doing (Shaire, 988-990) which can be grouped under two headings:

Legislative intent. Neuberger J first considered whether Parliament had intended there to be a change in the substantive law by the introduction of the 1996 Act, or whether its effect was merely to restate the legal position as it stood. There were strong reasons for thinking the former. The Law Commission clearly took the view that the legal position would be altered by the proposed reform, observing that their proposals should ‘clear the way for a genuinely broad and flexible approach’ (Law Com No 181, para 12.5 and 13.6). It is also implicit in the scheme of the Act that some form of substantive change was intended. Section 15 contains a non-exhaustive list of the sorts of factors which a court has to take into account when faced with an application for sale. Furthermore, under section 15(1), the interests of a chargee (in (d)) are to be given the same weight as those of minor children residing in the house (in (c)). The recognition of interests of children may itself have been a change in the law (Rawlings v Rawlings [1964] P 398, 419, but compare Burke v Burke [1974] 1 WLR 1063, 1067), but the equation of their interests with those of secured creditors was certainly a novel departure. Additionally, after 1996 an entirely separate regime applied to applications for sale by trustees in bankruptcy (section 15(4) of the 1996 Act and  the Insolvency Act 1996, s 335A. Section 335(3) expressly limits the exceptional circumstances test to disputes between occupying co-owners and trustees in bankruptcy). Taken together, this must be seen as a clear indication that chargees are no longer to be equated with trustees in bankruptcy, but are subject to the new and more flexible regime applying to disputes between co-owners.

Underlying policy. Finally, it is to be noticed that the shift in terminology, from “trust for sale” to “trust of land”, itself implies a change in policy, a view for which Neuberger J cites academic and judicial support (Megarry and Wade 2000, para 9-064; Emmet 1999, para 22-035; Peter Gibson LJ’s obiter observation in Banker’s Trusts Co v Namdar [1997] EGCS 20). The governing statutory scheme is no longer founded on the premise that land is simply an investment, but also acknowledges that it can serve as a home. It follows from this that the court needed to be equipped with new tools to give effect to this more realistic policy (Law Com No 181, para 12.3). 

This led Neuberger J to observe that as a consequence the old cases “have to be treated with caution, in the light of the change in the law, and in many cases they are unlikely to be of great, let alone decisive, assistance” (Shaire, 991).

The Balancing of the Various Interests
The new discretionary approach was described as follows: “Once the relevant factors to be taken into account have been identified, it is a matter for the court as to what weight to give to each factor in a particular case” (Shaire, 990). This acknowledges the fact that in these cases it is wrong to look for an outright victor (In fact, Neuberger J was forced to make a ruling as to who had ‘won’ for the purposes of costs, but was adamant that this had no bearing on any order he would be minded to make, were he called upon to do so: ibid, 995-996). Correctly analysed, these cases deal with the conflicting interests of two innocent parties, both the victim of fraud. The role of the court is to safeguard all of the parties’ interests as far as possible.

Neuberger J clearly set out the grounds which led him to his conclusion on the facts before him (ibid. 992-992). First, the factors relevant to the section 14 application for sale were given in sections 15(1) and (3). Two of these were relevant. TMC’s interest under section 15(1)(d) was plainly to have the property sold as soon as possible. Under section 15(3), the interest of the holder of the majority of the beneficial interest, Mrs Shaire, was to retain the home. 

Secondly, Neuberger J assessed the relative strengths of these criteria in the case at hand. Mrs Shaire’s strongest argument was based on the fact that she had an emotional attachment to the house. It had been her home for 25 years. Financially, its sale would not have resulted in great financial hardship. One further argument raised against sale by Mrs Shaire, that TMC were at fault for not taking sufficient care when granting the mortgage, was given short shrift by the court. Both parties were equally innocent, and nothing would be gained by attempting to allocate fault in such circumstances. 

TMC, on the other hand, had strong commercial arguments in favour of sale. The judge accepted their argument that the house was substantially larger than Mrs Shaire needed and, even if her son moved in with her, a much smaller house would have sufficed. Such a house could easily be bought with the proceeds of sale of her 75% beneficial interest. Furthermore, as Mrs Shaire had no intention to sell her house, TMC were tied into a 25% beneficial interest producing no income. Additionally, that beneficial interest was itself vulnerable as there was no control over the maintenance or insurance of the house except through the subrogated Chase Manhattan mortgage. This mortgage could, however, be redeemed at any time. TMC contended that even if sale was not ordered, they were entitled to some form of financial compensation for being kept out of occupation of the property. It was not clear on the evidence whether Mrs Shaire had the means to make such payments. Neuberger J left this issue open.

The Order
Rather than imposing an order, Neuberger J instructed the parties to attempt to come to an arrangement on the basis of his findings. This is understandable, as the precise financial position of Mrs Shaire, the value of the house and the nature of the local housing market were not known to the court. It is also a clear indication to future litigants that the courts will come to a conclusion based on common and commercial sense which well advised parties ought to be able to anticipate. This resource-saving attitude is entirely in line with one of the incidental objectives of the Law Commission reforms, to “assist in encouraging settlements out of court” (Law Com WP No 94, para 10.9).  

As a basis for negotiation, the court provided an outline of the type of order it would have been minded to make. A brief examination of the proposed order, quite unlike any available under section 30, is instructive. The starting point for Neuberger J was to recognise that TMC were “in the business of lending on property” (Shaire, 994). Any order made had to reflect this, as anything else would have defeated TMC’s needs entirely. The scheme therefore proposed was the following: TMC’s 25% share in the house would be converted to a secured loan and added to the subrogated 75% Chase Manhattan mortgage. Mrs Shaire would then be obliged to repay that loan at an appropriate rate of interest. In return she would retain her house. As Neuberger J pointed out such an arrangement was entirely contingent upon the ability of Mrs Shaire to make such payments. The judge made clear that if Mrs Shaire could not afford these repayments or if TMC could not accept such terms, sale was the only option open. Given the value of the house at issue and, unusually, the slight hardship this would have caused Mrs Shaire, this was an acceptable last resort. 

Evaluation
Although the fact-driven cases on the exercise of the court’s discretion under section 15 are likely to be at most persuasive authorities, some broader strands of principle can be tentatively drawn from Neuberger J’s judgment. When secured creditors apply for sale the asset/home dichotomy becomes acute. The more sophisticated approach present in Shaire will allow the courts to identify cases where retention of the home is both financially feasible and necessary with regard to the needs of, as a starting point, the remaining co-owner occupants. The frequently unjust blanket bias towards sale is no longer apparent, in that regard can be had to the welfare of the parties resisting sale where appropriate.

Underpinning the jurisdiction with regard to sale is a still a distinct but much more defensible “commercialist bias”. A defending owner-occupier must be able to demonstrate the ability to make appropriate payments under a restructured loan (potentially less favourable to the mortgagee than the original agreement) before the courts will consider refusing sale. A survey of the old caselaw would suggest that it will only infrequently be the case that this condition is satisfied. Clearly if there is no chance of the mortgagee receiving adequate recompense, sale is the only option, else the viability of mortgage lending, itself socially desirable, is called into question (see too the not yet fully reported Bank of Ireland Home Mortgages v Bell [2000] EGCS 151 (CA), which stresses the need to safeguard the interests of lenders in this context). Even where payments could be made, a secured creditor can still insist on sale, but only if it can be shown that this would result in no real hardship (as, for instance, in Shaire, see above). The concern expressed about the effect of the judgment on mortgagees is therefore somewhat overstated. 

The decision will nonetheless be viewed nervously by mortgagees: secured creditors’ applications for sale are not as certain to succeed as they were under section 30. Orders for sale will be unobtainable where the co-owner, aside from being in a position to make payments, can also persuade the court that sale will lead to real hardship. In these circumstances, commercial considerations must bow (albeit as slightly as possible) to the welfare of the parties. It remains to be seen how “hardship” will compare with the old “exceptional circumstances” test, however it must be a more generous concept on the interpretation of the relevant provisions by Neuberger J.  

This leads to the one potential difficulty with the judgment, in that lending institutions may now prefer to bring their application in the context of bankruptcy proceedings. This is the category of dispute where the “asset” aspect of family property remains paramount. Under the old law there was no difference in the test applied on an application for sale by either a trustee in bankruptcy or a secured creditor. Although the courts’ grounds for doing this have been noted, a further reason can also be given. Commonly, secured creditors will seek the sale of the security only when there has been a default on payments. The reason for that default on payments is frequently a cash flow problem on the part of the creditor immediately preceding his insolvency. Secured creditors often used the section 30 route as a more direct method of satisfying the debt rather than initiating bankruptcy proceedings (Wells 1998, 209). Often (as in Shaire itself, see 985) the debtor is, in all but name, a bankrupt. It is certainly possible that, in future, secured creditors will initiate bankruptcy proceedings when the time is right to ensure an almost certain sale, instead of a taking their chances under a section 14 application, with its concern for the welfare of parties whom it is practically possible to protect. 

This would be regrettable, as it undermines the protection the 1996 Act provides. It is, however, an inevitable consequence of the fact that in practice the same factual situation often offers these two alternative routes with diverging aims. What some view as the commercialist bias of the law in this context might therefore have merely been displaced, however the application of the 1996 Act by Neuberger J, which dilutes this bias as much as possible outside the bankruptcy setting, gives a welcome but necessarily imperfect glimpse of the practical reconciliation of the dual nature of family property. 

Bibliography

Clarke, D N (1994) “A Bankrupt Principle?” 58 The Conveyancer and Property Lawyer 331.
Cretney, S A (1994) “Abbey National v Moss  Comment” Family Law 55.
Dewar, J (1998), “Land, Law and the Family Home” in J Dewar and S Bright (eds), Land Law, Themes and Perspectives (Oxford: Oxford University Press).
Emmet on Title (ed. J Farrand) (1999), 19th ed (London: Sweet and Maxwell).
Gray, K (1993) Elements of Land Law (London: Butterworths 2nd ed).
Hopkins, N (1995)  “Credit and Collateral Purposes”  111 Law Quarterly Review 72.
Law Commission Working Paper 94 (1985) Trusts of Land (London: HMSO)
Law Commission No 181 (1989) Trusts of Land (London: HMSO) HC 391 Session 1988-89.
Megarry and Wade ( Eds Harpum, C with  Grant, M and Bridge, S) (2000), The Law of Real Property 6 th ed (London: Sweet and Maxwell).
Miller, G (1999) “Applications by the Trustee in Bankruptcy for Sale of the Family Home” Insolvency Law and Practice, 176. 
Pascoe, S (2000) “Section 15 of the Trusts of Land and Appointment of Trustees Act 1996- A Change in the Law?”  64 The Conveyancer and Property Lawyer  315 
Smith, R (2000) Property Law (Harlow: Longman 3rd ed)
Wells, R (1998), “Sale of the Matrimonial Home- Bank of Bharoda v Dhillon” Family Law 208.