On 17 June 2016 the Court of Appeal held in the case of Mortgage Express v Laura Lambert [2016] EWCA Civ 555 that a transaction to purchase a property for £30,000 with a true value of £120,000 amounted to an unconscionable bargain. However, due to Ms Lambert’s failure to disclose her true arrangement and interest in the property, it could not amount to an overriding interest and so was capable of being overreached.

Background

In late 2007, the Appellant found herself unable to keep up with the mortgage payments on her flat in Maidstone (the “Property”) which was worth around £120,000. Facing a potential possession order of her home, the Appellant made contact with Annonna Limited, a company owned by two gentlemen; Mr Sinclair and Mr Clement. On visiting the Property, they informed the Appellant that in fact it was worth only £30,000 and offered to buy her lease in this sum. They also told her that she could continue to live in the Property indefinitely – during the first year they said she could live there rent free and thereafter for £250 a month.

The Appellant having agreed to this, in September 2007 Mr Sinclair and Mr Clement applied to the Respondent for a buy-to-let mortgage. They stated that they were re-mortgaging the Property and that its value was £120,000. As part of this process, the Appellant was asked to fill in a questionnaire in respect of any overriding interests she may have had in the Property. One of the questions on this questionnaire concerned “rights of persons in occupation”, and asked for details of any applicable rights under this heading. The Appellant did not mention her own continuing occupancy.

On 4 October 2007, contracts were exchanged and completion occurred the next day; the contract price was £30,000 and the Appellant sold with full title guarantee. Specifically, clause 6 of the special conditions contained within the contract for sale provided that vacant possession would be given on completion.

The mortgage was completed in late October 2007 and in early 2008 Mr Sinclair and Mr Clement were registered at HM Land Registry as the proprietors of the lease, with a charge in favour of the Respondent registered at the same time.

In July 2008, having transferred the lease into the Respondent’s name, Mr Sinclair found himself unable to keep up with his repayments, and the Appellant once more found herself unable to pay the rent due. Accordingly, the Respondent appointed receivers to bring possession proceedings against her.

In the first instance claim, the Appellant pleaded that she was entitled to a leasehold interest in the flat for a term of years to be assessed and at rent of £250 per month. She also claimed that the transaction between her and Mr Sinclair and Mr Clement should be set aside on a number of grounds, including undue influence and misrepresentation. HH Judge Simpkiss dismissed these grounds; however, he said that the transaction should be set aside on the ground that it was an unconscionable bargain. Whilst this conclusion was not challenged, the judge made a possession order in favour of the Respondent.

Appeal

In the Court of Appeal, the Appellant, Ms Lambert, appealed against a possession order granted in the Respondent mortgage company’s favour alleging that since the transaction selling the property amounted to an unconscionable bargain the mortgage company were precluded from asserting a claim for possession against her.

The issues put to the appeal judges involved:

  1. The legal character of the right to set aside the transaction on the ground that it was an unconscionable bargain;
  2. How this fitted into the scheme of land registration; and
  3. Whether the Appellant was precluded from asserting her claim against the Respondent.

The Appeal judgment

Lord Justice Lewison considered section 116 of the Land Registration Act 2002 (the “Act”), which provides:

“It is hereby declared for the avoidance of doubt that, in relation to registered land, each of the following –

  1. An equity by estoppel, and
  2. a mere equity,

Has effect from the time the equity arises as an interest capable of binding successors in title (subject to the rules about the effect of dispositions on priority)”.

He also considered overriding interests contained within section 29 and Schedule 3, paragraph 2 (which sets out certain overriding interests) of the Act. He stated that a right to set aside a transaction on the grounds of misrepresentation or undue influence was “an equity” or a “mere equity”, and that there was no reason to suppose a right to set aside an unconscionable bargain was any different. Hypothetically, the Appellant’s right to have the sale set aside was therefore capable of being an overriding interest and could qualify as a right that is proprietary in character. Schedule 3, paragraph 2 of the Act does not create rights, but preserves existing ones. If the rights of the person in actual occupation do not give priority over the registered estate holder, Schedule 3, paragraph 2 does not change these rights.

Mr Sinclair and Mr Clement held the legal estate as trustees of land under sections 34 and 35 of the Law of Property Act 1925, since they were the joint registered proprietors and had entered into the mortgage. They had the powers of an absolute owner and after completion had taken place were entitled to be registered as proprietors. As a result, they were entitled to exercise the powers of an owner, including charging the estate, subject to the limitations prescribed in section 26 of the Act (which prevents title being called into question). However, there were no limitations applicable in respect of the Act or in the register itself at the time and as such there was nothing to affect the validity of the grant of the mortgage. Any attempts by the Appellant to call the Respondent’s title into question were defeated by section 26 of the Act – and strongly supported by the Law Commission and HM Land Registry’s Report – that if a right is asserted as an overriding interest, and that right is a right to impugn the title acquired by the disponee, then the Appellant could not do so.

Furthermore, what could be an overriding interest shifted from the land to the sale or mortgage proceeds, since there had been a sale or mortgage made by the two trustees and the capital monies were paid to them. In questioning whether the Appellant’s interest could be overreached, the judge decided that if the Appellant had an interest that was potentially an overriding interest, it was still overreached by the grant of the mortgage of two trustees, Mr Sinclair and Mr Clement.

On deciding whether the Appellant was precluded from asserting her claim against the Respondent, Lewison LJ stated that she had had not disclosed the right she was trying to assert before the mortgage was granted, even though the contract of sale had provided for vacant possession and she had given full title guarantee. It would have been reasonable for her to disclose that she did not give vacant possession: put simply, if she did not reveal her rights, she could not then assert them.

The appeal was dismissed.

Commentary

In the factual scenario before the Court the transaction was held to be an unconscionable bargain due to the following factors:

  1. The contract price was £30,000, despite the fact that the Property had been valued significantly higher at £120,000;
  2. The Appellant had no legal representation, even though she was an individual lay-person;
  3. Furthermore, she had been put under financial pressure to conclude the deal because of her debts and inability to pay rent; and
  4. Mr Sinclair had taken advantage of the Appellant by making her an offer that he knew was dishonest.

Whilst not providing an exhaustive list we consider the following considerations are to be had in order to avoid a transaction being set aside as an unconscionable bargain:

  1. Ensure that the contract price is for the full or reasonable value of the property.
  2. Try to avoid being pressurised into entering into a transaction because of your financial circumstances.
  3. Ask yourself whether the parties are of equal bargaining power.
  4. If not, ensure that both you and the other side have obtained independent legal advice.

It is clear that that Ms Lambert was given the opportunity to make her interests known and her failure to do so led the Court to finding that she could not subsequently rely on her ‘actual’ arrangement and avoid overreaching her interest. If you have an interest in a property and to ensure you are protected we advise careful consideration of all documentation completed and when making disclosure that full and frank disclosure is made.