HSBC Bank Plc v Dyche & Anor

The Claimant mortgagee (“HSBC”) seeks possession of a house at 3 Tonbridge Road, Whitley Coventry (“the Property”), which is registered at HM Land Registry under Title No WM81067.

HSBC has 2 registered mortgages dated 19^th December 2002 and 17^th January 2003 respectively, and is owed in excess of £80,000 by the First Defendant (“Mrs Dyche”), who was the mortgagor in each case.

Mrs Dyche is the registered proprietor of the Property, and is the daughter of the Second Defendant (“Mr Collelldevall”).

Mr Collelldevall claims to be the beneficial owner of the Property, where he has lived since 1976. His wife also lived there until her death in August 1994.

Mr Collelldevall also claims that his beneficial interest is an overriding interest having priority over HSBC’s 2 mortgages.

HSBC disputes Mr Collelldevall’s beneficial interest and says that any interest of Mr Collelldevall was overreached by one or other of (or a combination of) a transfer to Mrs Dyche and the 2 HSBC mortgages.

Mrs Dyche was made bankrupt in November 2006. The Third Party is her Trustee in Bankruptcy. Neither of them has taken any part in these proceedings. Mrs Dyche has not given evidence.

Mr Collelldevall was also formerly a bankrupt, having been made bankrupt on 12^th October 1988. As mentioned, he was then living at the Property with his wife. They were, immediately prior to the bankruptcy, joint tenants of the Property beneficially as well as legally. The effect of the bankruptcy was to sever the beneficial joint tenancy. Mr Collelldevall was discharged from his bankruptcy on a date which has not been identified more precisely than “early 1994”.

Following Mr Collelldevall’s bankruptcy, he and his wife were anxious to remain in the Property, which was their home. It appears that the Trustee in Bankruptcy obtained an order for sale of the Property in August 1992, which was not enforced. Subsequently, in November 1993, the then mortgagee, Coventry Building Society, obtained a possession order. That order also was not enforced.

On 28^th January 1994, the Property was transferred by the Collelldevalls to Mrs Dyche and her husband, with the concurrence of Mr Collelldevall’s Trustee in Bankruptcy, for £25,000. I shall call this “the 1994 transfer”. The Coventry Building Society’s mortgage (in the sum of £5,481.77) was discharged on completion. £18,000 was also paid to Mr Collelldevall’s Trustee in Bankruptcy, increasing the dividend in the bankruptcy. The purchase price bore no relation to the Property’s actual value, which was much more than £25,000. The price was set to meet the Collelldevalls’ immediate financial needs and commitments.

Mr Collelldevall’s case is that the Property was acquired by the Dyches for himself and his wife. In the light of his bankruptcy, the Collelldevalls were unable to obtain a mortgage in their own names. It was therefore agreed, he says, that the Dyches would obtain a mortgage from Lloyds Bank (“Lloyds”) for £17,000, which they did. The Property was (he says) transferred to the Dyches against a promise by them that it would be retransferred to the Collelldevalls once the £17,000 (which was treated as a loan from the Dyches to the Collelldevalls) and interest were repaid. The loan and interest were then calculated to be repayable by monthly instalments of £282.21 over 10 years, which corresponded to the monthly sums due under the Lloyds mortgage. The balance of the “purchase price” of £25,000 was provided by Mr Dyche, who borrowed £8,000 from a friend.

In effect, therefore, the Dyches were, according to Mr Collelldevall, acquiring the Property, and entering into the Lloyds mortgage, as nominees for himself and his wife.

I am mindful that I need to proceed with caution when considering the nature and effect of arrangements entered into many years ago, especially when they are raised to defeat the claims of third parties, such as HSBC, who are in no position to call positive evidence of their own in rebuttal. I am nevertheless satisfied that the agreement alleged by Mr Collelldevall is made out on the evidence. In addition to Mr Collelldevall’s own evidence, and that of his other daughter Lynne (whose source of knowledge was mainly though not exclusively her parents and not Mrs Dyche) the agreement alleged by Mr Collelldevall is corroborated by the fact that the loan repayments were made (including a payment in kind). There are also references to the loan arrangement, and the fact that £8,000 was borrowed by Mr Collelldevall from a friend, in contemporaneous letters from Mrs Collelldevall to Lynne. There is also a receipt for the £8,000 loan but it is so indistinct that I cannot place any reliance on it. I do however accept Mr Collelldevall’s evidence that this money was borrowed from the friend in question. In addition, a letter from Mrs Dyche dated 31^st May 2006 (written when she was very much at arms length from her father) clearly recognises the loan arrangement relating to the £17,000, and that payments have been made, including a payment in kind of an amount larger than that relied upon by Mr Collelldevall. Mrs Putnam (for HSBC) whilst testing the evidence by cross-examination, did not seriously challenge it. This was entirely understandable and proper, as she was in no position to amount an effective challenge.

Mr Weekes for Mr Collelldevall submits that the arrangements had the result that the Property was following the 1994 transfer held on constructive trust for the Collelldevalls. I agree.

The facts I have recited are, in my judgment, sufficient to give rise to a common intention constructive trust. The Collelldevalls agreed to transfer the Property upon the faith of a clear agreement or understanding that the Property would thereafter be held for them. That agreement and understanding was acted upon by their transferring the Property (at a price bearing no relationship to its true value) into the names of the Dyches, providing £8,000 (which they borrowed from a friend) towards the “purchase price”, treating the remaining £17,000 as a loan to them by the Dyches and making repayments to the Dyches corresponding broadly to the sums falling due under the Lloyds mortgage. I say “broadly” because arrears accrued until repayments by Mr Collelldevall began in 1995, though he was doing work for the Dyches for which he was given credit, and higher monthly payments were then made by him in an endeavour to cover the shortfall, though he missed some months later on as well. The last cash payment was made in January 2003.

The requisite common intention is also to be inferred from the simple fact that the Collelldevalls continued to have sole beneficial use of the Property as their home. Although the solicitors’ correspondence at the time of the 1994 transfer highlighted the need to give vacant possession, it was neither given in fact nor ever intended to be given.

The fact that the Dyches were under no immediate obligation to transfer the Property to the Collelldevalls while the loan instalments were outstanding does not alter my conclusion. A right of reimbursement (and associated right of retainer) is not inconsistent with acting as trustee, but an incident of doing so: see, generally, Lewin on Trusts, 18 ^th edition, at paragraphs 1-28; 21-44. As Lord Hoffmann also observed in Ingram v IRC [2000] 1 A.C. 293at 305:

Mrs Putnam contends that the agreement under which the Property was transferred to the Dyches was repudiated by late payment. As, however, late payment was accepted, there is nothing in this point. Had there been an accepted repudiation, the result would have been the same, as the Property was held on trust throughout. That would merely have entitled the Dyches to exercise their right of recoupment against the Property, or to sue Mr Collelldevall for the balance of the loan.

Mrs Dyche in July 2004 claimed that the arrears position was such that she had to take out a further loan. She had previously taken out a further loan from Lloyds, but this was for her own purposes, and not occasioned by any arrears. She went on to demand payment of £25,000, but never advanced any convincing explanation of why it was thought to be due.

Mr Weekes likens the position in the present case to a pre-1925 mortgage, which was effected by what was in form an absolute conveyance. Equity however recognised the pre-eminence of the right to redeem, with the consequence that the mortgaged property was owned by the mortgagor, subject to the mortgage: In re Sir Thomas Spencer Wells, Swinburne-Hanham v Howard [1933] 1 Ch 29, 52

Mr Weekes also relies on In re Duke of Marlborough, Davis v Whitehead [1894] 2 Ch 133. In that case, the Duchess of Marlborough transferred a lease to her husband solely to enable him to raise money on mortgage. The wife’s evidence was that, subject to the mortgage being repaid, the house was to come back to her, a situation similar to the present one. Stirling J, following Haigh v Kaye (1872) 7 Ch App 469 (a decision of the Court of Appeal) in preference to Leman v Whitley (1828) 4 Russ 423, held that the equity of redemption belonged to the Duchess.

I agree (subject to one point) that a similar approach is appropriate in the case of the 1994 transfer. Although the Property was transferred to Mrs Dyche and her husband, this was no more than as security for the liabilities under the Lloyds mortgage (which was taken out for the Collelldevalls) and did not enable the Dyches to assert, as against the Collelldevalls, beneficial ownership. .

The present case is however different from the above authorities in this respect: Mr Collelldevall, by reason of his bankruptcy, no longer had an interest in the Property at the time of the 1994 transfer, and could not therefore be regarded as mortgaging any interest which he then had in the Property. Any interest of his must have arisen as a result of the arrangements made at the time of the 1994 transfer and did not pre-date that transfer. I do not, however, regard this distinction as vital. A constructive trust is capable of coming into existence on the occasion of (and so as to override or qualify the effect of) a registered disposition: compare Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044. What matters in the present case is the common intention which pertained at the date of and following the 1994 transfer, and I am, for the reasons I have given, satisfied that the common intention was that the Property should (subject to the Lloyds mortgage) be the Collelldevalls’. It seems to me that the Court should give effect to that intention by recognising a constructive trust, and that to hold otherwise would be tantamount to sanctioning a fraud on (now) Mr Collelldevall.

As a fall-back position, Mr Weekes says that a conditional entitlement to have a property re-conveyed can be protected by a constructive trust, referring to Gray’s Elements of Land Law, 5 ^th edition at paragraph 7.3.25 and the New Zealand case of Last v Rosenfeld [1972] NSWLR 923. In the light of my decision on Mr Weekes’ primary argument, I need not consider this alternative way of putting the case. I do not regard the Dyches as ever having come under a conditional obligation. Their obligations as trustees arose at the date of the transfer to them, subject only to the Lloyds mortgage. They came under no immediate obligation to transfer the Property, because the mortgage was outstanding, but that does not mean, for the reasons I have given, that they were not trustees from the outset.

The question also arises as to whether, following the 1994 transfer, the Collelldevalls were joint tenants beneficially, or tenants in common. If they were joint tenants beneficially, Mr Collelldevall succeeded to his wife’s beneficial interest by survivorship. Otherwise, her interest would fall into her estate. She died intestate. So far as I am aware, no letters of administration have been taken out.

In Stack v Dowden, [2007]2 AC 432 at 458, Baroness Hale of Richmond said this:-

I do not understand this statement to preclude the inference of a beneficial joint tenancy in appropriate circumstances. I also note that the context was very different in that case. The situation Baroness Hale was considering was the common one where one of 2 parties acquires in his or her sole name a home to be occupied jointly by the 2 of them. Given the presumption that beneficial ownership follows legal ownership, it would, in that class of case, be surprising for the presumption to be rebutted in favour of joint beneficial ownership, as that raises the question: why, then, did the parties not acquire the home in joint names? The explanation may perhaps be easier to give when the unnamed party is to have, or is taken to have been intended to have, a share as tenant in common, for that interest can only exist behind the legal title.

In the present case, the presumption is that the Dyches were beneficially entitled under the 1994 transfer, but that presumption is rebutted, given my findings as to common intention. What was contemplated and agreed was that, upon discharge of the £17,000 indebtedness, the Property would be retransferred to the Collelldevalls jointly. Had that transfer occurred, the presumption would have been that they were beneficial joint tenants. There is nothing in the circumstances before the death of Mrs Collelldevall to show that the presumption would have been rebutted. On the contrary, as they were beneficial joint tenants before the bankruptcy, the inference is that this is what they intended they should become upon the retransfer into joint names. Any constructive trust should mirror that intention. The bankruptcy of Mr Collelldevall had, it is true, intervened by 1994, severing the beneficial joint tenancy, but that was by operation of law, and does not help in ascertaining the parties’ intentions at the time of the 1994 transfer. As the objective was to free the Property from the bankruptcy, it is more natural to infer that what the parties intended was to revert to the pre-bankruptcy position. In those circumstances, I find that the Property was, from the date of the 1994 transfer, held by the Dyches upon trust for the Collelldevalls as beneficial joint tenants, and that Mr Collelldevall became sole beneficial owner on her death.

In December 1995, more monies were apparently advanced by Lloyds to Mr and Mrs Dyche. These were apparently paid off when monies were borrowed later from HSBC, but Lloyds did not take a further mortgage on the Property. Lynne Collelldevall was also asked by Lloyds (both in 1995 and 1998) to sign a Deed of Postponement in respect of a proposed further mortgage, but did not do so. She tells me that she spoke to her father in 1998 about this who was furious at the idea of the Property being further mortgaged, and would not countenance the suggestion. I do not know whether she signed the earlier Deed of Postponement in 1995. An invoice from her solicitors suggests she may have done, but it was not produced in evidence and would not without more affect her father.

The only known mortgage affecting the Property until the HSBC mortgages was the Lloyds 1994 mortgage. I have not seen that mortgage. The case has proceeded on the basis that it secured only the advance of £17,000. Mrs Dyche in her letter dated 31^st May 2006 confirms that a further loan was taken out by the Dyches from Lloyds in 1995 and that she believes the Property as an asset was taken into consideration. She does not however say that the Property was mortgaged further at that time.

The 1994 transfer had the effect of overreaching the then beneficial interests of Mr Collelldevall’s wife and Trustee in Bankruptcy, but did not preclude a new beneficial interest from arising, pursuant to the parties’ agreement and common understanding, upon the occasion of that transfer. As however the Property was also mortgaged to Lloyds, the beneficial interest was converted into an interest in the equity of redemption. Upon the subsequent discharge of the Lloyds mortgage, it attached to the Property: see, generally, City of London BS v Flegg [1988] 1 AC 54 at 71-72.

On 19^th December 2002, the Property was transferred to Mrs Dyche by herself and her husband in connection with divorce proceedings. I shall call this the 2002 transfer.

The 2002 transfer was expressed to be “pursuant to a Court Order under which [Mrs Dyche] had paid to [Mr Dyche] the sum of £5,000”, though in fact no Court Order governing the matter had then been made. The £5,000 was indeed paid by Mrs Dyche to her husband. This was the only consideration which passed on the occasion of the 2002 transfer.

On the same date, Mrs Dyche gave HSBC a first legal mortgage, which I shall call “the first mortgage”, in all monies form. In order to obtain that mortgage, Mrs Dyche provided HSBC with what purported to be an assured shorthold tenancy agreement dated 1^st November 2002 (“the tenancy agreement”) naming herself as landlord and Mr Collelldevall as tenant. Mr Collelldevall says (and I accept) that his signature on this agreement was a forgery, and that he knew nothing about it. The handwriting expert (Dr Giles) has not verified this (nor has she said that the signature is genuine) as she has not seen the original of the tenancy agreement. That shows proper professional restraint, but I have Mr Collelldevall’s unchallenged evidence, and the signature looks decidedly suspect. I accept his evidence that the signature is not his, and no-one else has been suggested as having had authority to sign the agreement on his behalf. I also accept his evidence that he knew nothing of the first mortgage, and did not authorise it. He also knew nothing of a further unauthorised mortgage given by Mrs Dyche in favour of HSBC dated 17^th January 2003 (“the second mortgage”) which, again, must have been granted in reliance on the tenancy agreement, though it was not necessary, as the first mortgage covered all monies due.

Mr Collelldevall did know that Mrs Dyche was proposing to take a transfer of the Property into her sole name, though he says he was told this after the divorce. He told me (and I accept) that she promised to transfer the Property to him once the transfer had happened. This was a deception on Mrs Dyche’s part, as she had already taken the transfer into her own name for her own benefit, and the HSBC mortgage advances were used to discharge indebetedness of approximately £6,000 to Lloyds (the evidence does not reveal how much of it, if any, was secured indebtedness), to pay £5,000 to her husband, to discharge her solicitors’ outstanding fees in connection with her divorce and the conveyancing costs, and to finance her ongoing business activities. She had no intention of transferring the Property to Mr Collelldevall, and could not have done so, consistently with her own obligations to HSBC, so long as monies remained outstanding to HSBC.

In those circumstances, it is clear that Mrs Dyche acted in breach of trust (as did her husband) by transferring the Property to herself, and must have known this. The 2002 transfer was clearly intended to be a beneficial transfer to herself, as it coincided with the grant of the first mortgage and the payment out of monies for her purposes, including to her husband in connection with their divorce. In addition, in effecting the transfer and mortgaging the Property, she acted dishonestly, as she must have known both that the transfer and the first mortgage were unauthorised by Mr Collelldevall, and that Mr Collelldevall’s signature on the tenancy agreement was a forgery. Indeed, as she used that agreement to borrow money from HSBC, the probability is that she was the forger. Whilst there is nothing to suggest that her husband was party to the forgery, he must have known that he was acting in breach of trust in transferring the Property to his wife in return for the payment of £5,000 to himself.

Overreaching in general is said to be an incident of a trustee’s equitable authority to make dispositions of the trust property: Snell’s Equity, 31 ^st edition, at paragraph 4-16. On the footing that the 2002 transfer was unauthorised, it is difficult to see how that could as a matter of general principle overreach Mr Collelldevall’s interest. As Millett LJ observed in his dissenting judgment (subsequently upheld in the House of Lords) in Ingram v IRC [1997] STC 1234 at 1259, for overreaching purposes there must be not merely two parties to the transaction but two independent parties who are capable of dealing with each other at arm's length.

Overreaching is nevertheless said to follow in this case from section 2(1)(ii) of the Law of Property Act (“LPA”) 1925, by which a conveyance by trustees of land (formerly trustees for sale) of a legal estate in land to a purchaser overreaches any equitable interest affecting that estate.

The expression “purchaser” is defined in section 205(1)(xxi)LPA 1925 as meaning, so far as presently relevant, “a purchaser in good faith for valuable consideration and includes a lessee, mortgagee or other person who for valuable consideration acquires an interest in property except that in Part I of this Act…” [which includes section 2] “…‘purchaser’ only means a person who acquires an interest in or charge on property for money or money's worth; and in reference to a legal estate includes a chargee by way of legal mortgage…”.

Given that Mrs Dyche was a trustee acting in dishonest breach of trust, she cannot be said to have been purchasing “in good faith”. Neither she nor those claiming through her can therefore claim that she was a “purchaser” within section 2. I should, perhaps, mention that the definitions in section 205 apply “unless the context otherwise requires”. Here, the context positively requires the definition to apply, as otherwise a trustee could overreach the beneficiary’s interest in favour of himself.

In addition, the terms of sections 2(1)(ii), 2(2) and 27LPA 1925 require the conveyance to be made by (and any capital money paid to or by the direction of) at least two trustees or a trust corporation. The £5,000 was not paid to two trustees or a trust corporation, but by one trustee (Mrs Dyche) to another trustee (her husband). It must however have been so paid by the direction of both of them, so I would not regard this as objectionable (assuming the £5,000 to be properly characterised as capital money) if section 2 otherwise applied.

I have already explained that the Lloyds mortgage did not preclude Mr and Mrs Collelldevall’s beneficial interest from arising in 1994, but meant that it affected only the equity of redemption. Given that the Lloyds mortgage was redeemed, Mr Collelldevall’s interest now has priority against not only Mrs Dyche’s equity of redemption, but against HSBC also, unless the first and second mortgages themselves overreached that beneficial interest by transferring it to the equity of redemption.

The HSBC mortgages were undoubtedly conveyances within section 2, as “conveyance” includes a mortgage or charge: section 205(1)(ii). As already seen, “purchaser” also includes a mortgagee. HSBC acted in good faith and was, therefore, clearly a “purchaser” as defined. However, the mortgage monies were advanced by HSBC to Mrs Dyche alone and were applied by her direction alone and not that of her husband as well, so section 2 does not, on the face of it, apply. It seems to follow from this that Mr Collelldevall’s interest was not overreached by either the first or second mortgage.

Mrs Putnam submits that I should look at the 2002 transfer, and the first mortgage, as an indivisible transaction, following Abbey National BS v Cann [1991] 1 AC 56, in particular Lord Oliver of Aylmerton at 92F-93C. For this reason, as that case demonstrates, a purchaser dependent on a mortgage or charge never acquires more than the equity of redemption, notwithstanding that 2 transactions (the transfer and the mortgage) are needed to achieve that result. Therefore (Mrs Putnam contends) as Mrs Dyche only acquired an equity of redemption as against HSBC, Mr Collelldevall’s interest can only affect that equity of redemption.

I reject this argument. Mr Collelldevall’s beneficial interest subsisted before the 2002 transfer, and was not overreached by that transfer, for the reasons I have given. The fact that, as between Mrs Dyche and HSBC, Mrs Dyche may only have had an equity of redemption is immaterial, as the issue is whether or not HSBC’s first mortgage had the effect of overreaching Mr Collelldevall’s existing beneficial interest. As that mortgage was granted by a sole trustee, and the monies were advanced to her alone and applied at her sole direction, there was no overreaching. It follows that the first mortgage does not affect the beneficial interest of Mr Collelldevall. The Abbey National case is in my judgment irrelevant to the issues I have to decide. Any question of overreaching must be judged by reference to the provisions of the LPA 1925 to which I have referred. The conveyancing machinery cannot be ignored. Moreover, even if the 2004 transfer and the first mortgage are regarded as one and indivisible, that still did not make anyone other than Mrs Dyche the mortgagor. It remains the case that the first mortgage was granted by one only of two trustees, and that one only of two trustees received or directed the application of the capital money arising under the mortgage.

Exactly the same conclusions apply in the case of the second mortgage, which has the additional feature that, having been granted after the transfer and first mortgage, it cannot be regarded as one and indivisible with the transfer.

It follows also that Mr Collelldevall’s beneficial interest overrides the registration of HSBC’s mortgages, as he was in actual occupation throughout: section 70(1)(g) of the Land Registration Act 1925, now replaced by paragraph 2 of Schedule 3 to the Land Registration Act 2002. HSBC could have avoided the present position by making inquiries of Mr Collelldevall, but, though a Letter of Consent was considered, they chose not to proceed down that route, as the documents appeared to be in order: internal HSBC fax of 7^th November 2002 and the undated reply. By not making any inquiries of Mr Collelldevall direct, they assumed the risk of the tenancy agreement turning out to be a forgery. The risk may have seemed remote, but has now come to pass, and HSBC misses out because of it.

Mr Collelldevall with the help of his other daughter, Lynne, has provided a breakdown of the payments he made, supported by documentary evidence. This shows that (taking into account the payment in kind for building work at the lower figure mentioned by Mr Colelldevall, which he put at £1,240) a total of £32,270 was paid

. Assuming payment remained due at the rate of £282.21 per month, there was a shortfall of £1,595.20, which Mr Collelldevall says he is willing to pay in return for a transfer of the property. However, Mrs Dyche in her letter dated 31^st May 2006 reveals that £2,600 was offset by her and her husband for building work. This is an admission of a payment in kind greater (by £1,360) than the sum put forward by Mr Collelldevall, which leaves a much reduced balance of (£1,595.20 - £1,360) = £235.20. Given, also, that the Lloyds mortgage must have been redeemed within the 10 year period, as the HSBC mortgage could not otherwise have been granted, it cannot be the case that Mrs Dyche paid all the mortgage instalments (which included interest) over the whole 10 year period. It is likely that a lower total figure was paid for early redemption. I have not seen a redemption statement from Lloyds. On the limited material available to me, the probability is that Mr Collelldevall has paid, in cash or in kind, all the sums needed to indemnify Mr and Mrs Dyche in respect of the £17,000 Lloyds advance. As that is precisely what he agreed to do, I find that he is now entitled to a transfer of the Property without further payment.

Finally, the question of subrogation to the Lloyds mortgage was raised in Mrs Putnam’s skeleton argument, but could not effectively be pursued, as there was no satisfactory evidence as to the extent if at all to which secured, as opposed to unsecured, indebtedness to Lloyds was paid off out of the HSBC mortgage advances. I suspect that secured indebtedness was included, as approximately £6,000 was requested by the conveyancing solicitors for payment to Lloyds. However, the point was not explored in evidence, and I need say no more about it.

In the circumstances, HSBC’s claim for possession is dismissed, and Mr Collelldeval is entitled to a declaration that he is solely beneficially entitled to the Property and that his interest overrides the interests of HSBC as mortgagee. He is also entitled to a transfer of the Property free from the HSBC mortgages.

I shall ask Counsel to try to agree and lodge a Minute of Order giving effect to this judgment. The parties and their advisers need not attend its handing down. A disposal hearing may be arranged through my clerk, if one is needed, when any consequential matters will also be considered. If the parties find it more convenient, that hearing may be by telephone.